What Exactly Is A Reverse Mortgage?

A reverse mortgage is a speciality mortgage product only made available to people in Canada over the age of 55. In Canada, it is actually called the CHIP Reverse Mortgage – as it is a renamed version of a product that used to be called ‘CHIP’ (Canadian Home Income Plan).

It gets it’s name from the fact it is almost the opposite (or ‘reverse’) of a traditional mortgage – in that there is no credit score requirement, you don’t need income to qualify and there are no monthly payments.  So the lender is paying you money, without the requirement that you repay any of it – which is why it is considered the ‘reverse’ of a traditional mortgage.

This can lead many people to be suspicious of a CHIP reverse mortgage – because it seems too good to be true.

However, there is still interest charged on the mortgage – with the rate being a little bit higher than a Home Equity Line of Credit and more higher than a traditional mortgage.

Basically, you have to take on a slightly higher interest rate on the mortgage to get all the benefits of a reverse mortgage.  However, the interest rate is still not as high as an unsecured line of credit, personal loan or credit card.

You should note that – while this seems like a great deal to you – the lender still gets something out of it.  The lender makes their money if and when the owners pass away and the house is either sold or re-mortgaged to pay back the loan – plus interest.

So this is not a handout and not a free lunch – the lender does get something in return, making it a viable product for them to offer.

The best way of thinking about this is that with a traditional mortgage, amortization periods can be 25 to 30 years – so it can be 25 to 30 years before the lender gets their money back in full.  A reverse mortgage is following the same concept – long term lending.  Except that the lender won’t get their money back until all home owners pass away.

The Pros And Cons Of A Reverse Mortgage

Briefly, the advantages of a CHIP reverse mortgage in Canada can be considered to be the following:

• Tax free money. There are literally no taxes to be paid on the money received, since it is still technically a loan.
• You get to stay in your home for life – there is no way a reverse mortgage can cause you to lose your home.
• No monthly payments.
• No income or credit score is required to qualify.

The disadvantages of a reverse mortgage are considered to be:

• The rate is slightly higher than a Home Equity Line Of Credit (HELOC) and much higher than a traditional mortgage. However, not anywhere as high as an unsecured line of credit (credit line), personal loan or credit card.
• Moving home – if you ever wanted to – is slightly harder, as now you have to discharge a mortgage.  Note that this is the same process with any mortgage or HELOC though.
• Assuming that you spend all the money, or you aren’t simply replacing one mortgage with another, you are potentially reducing the size of your estate.  This would also assume that home equity growth doesn’t outpace interest accumulation – which is often not the case because of how the mortgage is structured (that the maximum equity withdrawal is 55%).
• You may not qualify for the full 55%. The amount you qualify for depends on your age, the property type and property location. The lender obviously favours properties in urban areas that are easy to sell – in case this is what they have to do to get their money back once the home owners pass away.

This is not a complete list of pros and cons of a CHIP reverse mortgage – I would suggest you to mortgage professional to get feedback on the specific advantages or disadvantages that apply in your particular situation.