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How does a reverse mortgage work?

A reverse mortgage is a loan in which you get money from your home’s equity without selling your house. It gives you access to tax-free cash–up to a certain amount of the current appraised value of your home–which you can use for just about anything you need, providing you with some measure of financial flexibility. Here’s what you need to know about reverse mortgages.

How a reverse mortgage works

If you’re looking to take out a reverse mortgage on your home, first, you must pay out any outstanding loans or lines of credit secured by your home. The funds you receive from a reverse mortgage will be used to pay off this debt, if there is any remaining. Further, be aware that if you have a reverse mortgage, you may not be able to take out other home equity lines of credit.

If you are approved for a reverse mortgage, you can access the money either by:

  • Taking all the money at once in a lump sum
  • Taking some of the money upfront and then accessing the rest over time in regular monthly or quarterly payments
  • Taking some of the money upfront and having the option to take out additional amounts in the future

Interest accrues throughout the life of the loan, but it’s rolled into the mortgage balance.

How to qualify

Reverse mortgages are for Canadian homeowners who are age 55 or older and need access to their home equity (if more than one person is on title, all titleholders must be at least 55 years old). If you meet those conditions, the amount you qualify for depends on:

  • The location of the home
  • Appraised value of the home
  • Your age

The home you obtain the reverse mortgage on must be your primary residence, which typically means you must live in that home for at least six months each year. Your credit history is a consideration, but reverse mortgages are designed to help people improve their current financial situation, so people with a low credit score may still be eligible to apply for the reverse mortgage.

Repaying your reverse mortgage

Unlike a traditional mortgage, you don’t need to make regular payments on your reverse mortgage. You must pay the amount owing if any of the following occur:

  • You sell your home
  • You move out of the home
  • The last borrower dies

When the last borrower dies, the estate is responsible for paying the entire amount still owing. If you can pay off the principal and interest early, you can do so but may have to pay a fee depending on your contract with the lender.

How you can use your reverse mortgage

You can use money from your reverse mortgage to set up a stable source of income, cover your living expenses, pay for healthcare expenses, fund home repairs, or anything else you may wish to do.

Things to know about reverse mortgages

It’s important to be aware that while the money is tax-free and you don’t have to make regular loan payments, reverse mortgages typically come with higher interest rates than other mortgages. Among the benefits of taking a reverse mortgage are that you get to stay in your home, retain ownership and title, have increased financial freedom, and you may be able to access additional equity in your home if its value increases. If you need access to cash and don’t want to give up living in your home, it can be worth it to consider whether a reverse mortgage is a right choice for you.