Canada’s reverse annuity mortgages

Since they were introduced to Canada in 1986, reverse annuity mortgages have become relatively popular with mature homeowners who see an opportunity to tap the cash in their home without selling it.

For example, say a cash-poor senior owns a home worth $300,000. With a reverse annuity mortgage, the owner could withdraw up to 40 per cent of the value of the house, either as a lump sum or in monthly payments, tax free.

There are many advantages to a reverse mortgage, such as providing seniors with the funds to stay in their homes longer, allowing a senior extra money for a vacation or even for other real estate investments. Reverse mortgages are not ideal for everyone so it is important to shop around and consider all the options available.

Generally, reverse mortgages are aimed at homeowners aged 62 or older who have paid off their mortgages and own their home outright.

No payments are made on a reverse mortgage until the home owner either dies or moves out of the house, at which time the initial loan plus the interest must be paid back, usually through the sale of the home. Because the proceeds from a reverse mortgage are classified as a loan rather than income in Canada, they are non-taxable.

Reverse mortgages are available at major Canadian banks, which act as agents for the Canadian Home Income Plan Corp. based in Toronto. Most Ontario credit unions, members of Credit Union Central of Ontario, also offer them.

There are some concerns, primarily in assuring that the reverse mortgage does not use up all the equity in a home. However, both companies offering reverse mortgages in Canada are conservative in the amounts of money they will lend. The Canadian Home Income Plan, which pioneered the program, for example will lend only from 10 per cent to 40 per cent of a home’s equity. The company will lend a minimum of $14,500 and a maximum of $500,000 per applicant.

Aside from the reverse annuity mortgage, there are a number of different reverse mortgages products on the market, all aimed at different needs and circumstances. Make sure you find the one that is right for you.

One option is the Line of Credit Reverse Mortgage. This plan allows the borrower to take out only the amount of money he or she requires at any given time, often to a maximum annual amount. Interest is calculated on the total amount withdrawn. Line of Credit Reverse Mortgages are best for homeowners who only want to withdraw money when they need it. This keeps interest charges to a minimum.

Fixed Term Reverse Mortgages provide money for a specific amount of time, often from five to ten years. After the term is over, the entire loan plus interest must be repaid, even if it means selling the house to do so. Fixed Term Reverse Mortgages are appropriate for people who only need money for a short time. Keep in mind, however, that most cases the entire loan must be paid all at once at the end of the fixed term. If you do not have enough money to pay back the loan, you may have to take out a standard mortgage and make payments, or sell your house to raise the funds.

As with any major real estate transaction, it is advisable to discuss reverse mortgages with a third party, such as a financial advisor or a lawyer, before entering into an agreement.

Canada Mortgage and Housing Corporation has published a handy free guide ‘Home Equity Conversion Mortgages: New Financial Options for Senior Home Owners’. For a copy, contact a local Canada Mortgage and Housing Corporation (CMHC) office, or write to the Public Affairs Center, CMHC National Office, 682 Montreal Road, Ottawa, Ontario, K1A 0P7.

By: Frank O'Brien
September 27, 2001

Copyright 2001 Inman News Features
Distributed by Inman News Features