Mike Cara

Reverse Mortgages in Canada vs. the U.S.: Why the Difference Matters

Reverse mortgages have developed a reputation that makes some Canadian homeowners uncomfortable before they even understand how the product works.

One reason may be surprisingly simple: many of the reverse-mortgage stories Canadians have heard come from the United States.

American television, news reports and online articles cross the border every day. Over time, stories involving American reverse mortgages can become part of the Canadian perception of the product.

But Canadian homeowners shouldn't make a retirement-financing decision based on an American reverse-mortgage story.

Canadian and U.S. reverse mortgages are not the same product.

For homeowners in Peterborough and the Kawarthas who have accumulated substantial equity in their homes, understanding the difference is an important first step.

Canadian Protections Include No Negative Equity

One of the biggest concerns homeowners have about reverse mortgages is straightforward:

“Could I eventually owe more than my house is worth?”

Canadian reverse-mortgage products include no negative equity protection, subject to the homeowner meeting the obligations of the mortgage.

That protection directly addresses one of the fears many homeowners have about using a reverse mortgage.

There are still costs.

Interest accumulates and compounds. The mortgage balance increases over time, and borrowing against the home reduces the equity that would otherwise remain available.

A reverse mortgage isn't free money.

But understanding those costs is very different from assuming that a homeowner can simply end up owing an unlimited amount beyond the value of the property.

You Continue to Own Your Home

Another common misconception is that getting a reverse mortgage means giving ownership of the house to the bank.

It doesn't.

The homeowner retains ownership of the property.

The lender registers a mortgage against the home as security for the money borrowed, just as lenders do with other mortgages.

The homeowner remains responsible for obligations including property taxes, insurance, maintaining the property and complying with the mortgage terms.

You Don't Make Regular Mortgage Payments

This is one of the fundamental differences between a reverse mortgage and a conventional mortgage.

You don't make regular mortgage payments.

Instead, interest is added to the outstanding mortgage balance.

That can be particularly important for retired homeowners whose primary concern isn't their net worth, but their monthly cash flow.

Consider a homeowner who owns a valuable Peterborough property but is still making mortgage, line-of-credit or other debt payments every month.

The homeowner may have considerable wealth tied up in the house while having relatively little disposable income.

Using home equity to eliminate monthly debt payments can change that cash-flow picture considerably.

But the cost of doing so still needs to be compared with the alternatives.

Eligible at 55 Doesn't Mean You Should Get One at 55

Canadian reverse mortgages are available beginning at age 55.

But eligibility and financial strategy are two different things.

In Mike Cara's experience, around age 70 or 71 can be a particularly useful time for homeowners to evaluate whether a reverse mortgage belongs in their retirement strategy.

By that stage of retirement, homeowners often have a much clearer understanding of their actual income, expenses and lifestyle.

They know whether their retirement income is sufficient.

They know whether they intend to remain in their home.

They know whether debt payments are putting pressure on monthly cash flow.

And they have a better understanding of how much of their home equity they want to preserve versus how much they might want to use during their lifetime.

The objective isn't to borrow simply because the money is available.

The objective is to determine whether accessing home equity solves a financial problem.

How Is the United States Different?

The dominant American reverse-mortgage product is the Home Equity Conversion Mortgage (HECM).

The HECM operates through a U.S. federal program insured by the Federal Housing Administration and is available beginning at age 62.

The American program has its own qualification requirements, mortgage-insurance structure, counselling requirements, costs and regulations.

Canada does not simply duplicate the American HECM system.

That makes it dangerous to take an American reverse-mortgage story and assume the same circumstances apply to a Canadian homeowner.

The name may be the same.

The mortgage system isn't.

Is a Reverse Mortgage a Good Idea?

That isn't the right question.

A better question is:

“Compared with my other options, what would a reverse mortgage accomplish?”

A homeowner considering accessing equity should also examine alternatives such as a conventional refinance, home equity line of credit or another home-equity lending strategy.

A conventional mortgage can have a lower interest rate, but it requires qualification and regular mortgage payments.

A reverse mortgage eliminates those regular mortgage payments, but the interest accumulates and the balance grows.

Neither fact alone determines which strategy is better.

The homeowner's income, age, debts, available equity, retirement objectives and plans for the property all matter.

Peterborough Homeowners May Be Sitting on Significant Home Equity

For many longtime homeowners in Peterborough and the Kawarthas, their house represents one of the largest assets they have accumulated.

The problem is that home equity isn't cash flow.

A homeowner can own substantial real estate equity while struggling with monthly expenses.

That doesn't automatically mean a reverse mortgage is the solution.

It means the equity deserves consideration as part of the homeowner's overall retirement-financing strategy.

Sometimes the right answer is a reverse mortgage.

Sometimes conventional refinancing makes more sense.

Sometimes the homeowner shouldn't borrow against the property at all.

The key is comparing the options before deciding.

Don't Make a Canadian Retirement Decision Based on an American Story

Reverse mortgages deserve careful consideration.

The balance grows.

Interest compounds.

Using home equity today affects the equity remaining tomorrow.

Those facts should be clearly understood.

But fear based on something that happened under a different mortgage system in another country isn't a substitute for understanding the Canadian product.

Canadian protections include no negative equity. You retain ownership of your home. You don't make regular mortgage payments. Evaluate the mortgage alongside your other options.

Before deciding whether a reverse mortgage is right or wrong for you, understand what it would actually accomplish in your retirement plan.

As a Certified Canadian Reverse Mortgage Consultant and Peterborough mortgage broker, Mike Cara helps homeowners compare reverse mortgages with conventional refinancing and other home-equity strategies.

The objective isn't simply to obtain a mortgage.

It's to determine which financing strategy makes sense.

Your Mortgage Advocate,

Mike Cara

Mortgage Broker in Peterborough, Ontario