Reverse Mortgage Rates And Penalties
Some of the most common questions we get are about the usual reverse mortgage rates and what our rates are like.
As much as we would like to give everyone the exact answer, that’s impossible. Rates are not universal and are particular to an individual and the mortgage. This is one of the key aspects to understand when it comes to a reverse mortgage.
For instance, if you get a 5-year fixed reverse mortgage, you would pay a much higher rate than for a 1-year fixed reverse mortgage.
The rule also applies to traditional mortgage costs. I’ve seen many websites out there that advertise some extremely low mortgages, but when you fill out all the information, you will receive an alert that you don’t meet all the qualifying conditions for that low mortgage rate. This is a common “bait and switch” strategy many companies use, not only in the financial world but globally as well.
Regardless of this, I want to point out some important aspects of reverse mortgage rates to help you get a better understanding of it – particularly the pros and cons. I will also update this article regularly so you can get the latest and most accurate information on Canadian reverse mortgage rates.
What Are The Current Reverse Mortgage Rates in Canada?
The current reverse mortgage rates in Canada are around 3.89% to 4.59%. The rate and the amount you can borrow depend on several things:
- Your age
- Your spouse’s age
- The amount you loan
- The location of the property
- Type of property (condo, house, townhouse, etc.)
- Condition of property
- The appraised value of the property
- Your home equity
Because of these variables, there is no exact rate I can quote. However, reverse mortgage rates have been in the 3 to 6% range for a while, so we can expect them to remain on that level in the near future.
Are These Better Rates Compared to Other Mortgage Products?
Again, I cannot say that exactly because the rates of other mortgage products are constantly changing and depend on what an individual qualifies for (if anything at all).
As of now, you’re looking at a rate of approximately 2.49% to 3% for a standard 5-year, fixed-rate mortgage. The rate is 2.95-4.45% for a Home Equity Line Of Credit and 8-12% for a Line Of Credit (unsecured).
To give you a better idea of the rates offered across different financial loan options, we can split them into two groups:
- Higher Interest Rates:
- Credit cards
- Line of credit (unsecured)
- A second mortgage
- Lower Interest Rates:
- A reverse mortgage
- Home Equity Line of Credit (HELOC)
- “Top” mortgage
How Does This Impact Your Home Equity and Net Worth?
In my experience, I’ve noticed that many people don’t understand that both a mortgage and a Home Equity Line Of Credit reduce your net worth.
This can mainly be attributed to people’s psychology. Most people are focused on meeting the monthly payments they owe, which also includes the interest. So, a lot of people are unaware of the interest rate they are paying and how it reduces their net worth. It doesn’t accumulate, so they don’t notice it’s actually there.
To put things into perspective, here’s how much a 5-year $100,000 loan would approximately cost you across different loan types:
- Credit card – $111,667
- Personal Loan – $64,531
- Line of credit (unsecured) – $41,763
- Second mortgage – $41,763
- Reverse mortgage – $27,946
- HELOC – $22,139
- Traditional mortgage – $13,882
What About Compounding Interest?
Note that every mortgage in Canada compounds every six months (semi-annually). A HELOC, on the other hand, compounds every month.
This means that the impact of the HELOC interest will be greater as it’s compounded more often than a mortgage. This is an important fact to be aware of.
Do note that your home equity growth can offset some of the interest costs, but I’ll explain this more into details further below.
You have probably noticed until now that the cost of a reverse mortgage is higher than a “top” mortgage of HELOC but much lower than other options available.
It’s best if you see the additional interest as a price you pay to get some extra features than a HELOC or a top mortgage don’t include. For instance, you don’t need to make any payments, you still get to live in your home for the rest of your life, and you don’t even need an income or a top credit score to qualify for a reverse mortgage. These features cannot be said for the other financing options.
The main question you need to ask yourself here is if all these features are worth it? If the answer is yes, then a reverse mortgage is the choice you should make.
What About Your Home Equity?
A common misconception about reverse mortgages is that they eat away the home’s value when it’s not the case. The only case when this is true is when a home’s value doesn’t increase at all.
However, considering that almost every home in Canada is growing in value for the past five years, this can rarely happen. The chances are almost 0% if we’re looking at recent years.
So, we come to another common question – How much does a home value need to grow to offset the cost of the reverse mortgage? There is a simple trick to figure this out, at least approximately. Your property’s value needs to increase at least half of the interest rate.
Why is that so? Well, a reverse mortgage is taken out on a maximum of 55% of your property’s value. Your home equity growth still compounds on 100% of your property. As the mortgage balance is half the size of it, your home equity needs to be only around half the interest rate.
If you took out a mortgage less than 55% of your home’s value, then the equity growth of it can be less than half of the interest rate. You will still have a home equity growth over time in this case too.
To follow up on our previous example, let’s suppose your home value is currently $250,000, and you took out a $100,000 loan, the same as previously. Here is how your home equity growth would look like over five years under different scenarios:
- Home equity growth at 1% – $12,818
- Home equity growth at 2% – $26,292
- Home equity growth at 3% – $40,457
- Home equity growth at 4% – $55,347
- Home equity growth at 5% – $71,001
- Home equity growth at 6% – $87,456
As you can see, for a property valued at $250,000 with a $100,000 reverse mortgage, the home equity growth would need to be just over 2% to offset all the interest costs. If the growth is above 2%, then you would earn yourself some extra home equity while having a reverse mortgage on it at the same time.
While it may sound too good to be true, it’s what many Canadians are experiencing at the moment. In fact, some of the hottest areas in Canada in terms of real estate have seen home equity growths that go to the double digits just in the past five years!
What About Reverse Mortgage Penalties?
It’s rare that people ask us about reverse mortgage penalties because the whole point of a reverse mortgage is to live in your home for the rest of your life.
However, some see it as a short-term solution, so there are some instances where reverse mortgage penalties are put in place.
In general, there is a golden rule in reverse mortgage penalties. If you start paying it off after the 5th year, the penalty will be very small. And, the closer you are to 5 years, the lower the penalty is.
As you can see, this principle is pretty similar to the one of a “regular” mortgage. And in that same fashion, you can also make prepayments as you would in a normal mortgage. However, you only get a certain allowance of these each year. The allowance amount in the case of a reverse mortgage is 10%, which means you can pay off up to 10% of the balance each year without penalty.
Here is how penalties are set up to 5 years:
- Year 1 – 5% interest
- Year 2 – 4% interest
- Year 3 – 3 % interest
- Year 4-5+ – 3 months interest or IRD
You probably notice that these are pretty similar to regular mortgage penalties. In fact, some IRD calculations of the big 5 banks have resulted in penalties higher than 5% in year three only.
You should also note that there are no penalties charged when the owners of the property passed away. If the owners of the house move away to move to a nursing home, on the other hand, there is a penalty charged, but it will be reduced by 50%.
The penalty is higher in the first year, but beyond that, I would say that the penalties for a reverse mortgage are more or less the same as those in regular mortgages. In fact, it’s lower than many fixed-rate mortgage products compared to the IRD of the big 5 banks.
What About Other Costs?
Of course, there are other costs and fees involved with reverse mortgages. To find out what they are and when they apply, I suggest you check out our article covering reverse mortgage costs and fees.
I’ve laid out the reverse mortgage rates and penalties, explained how they work, and compared them to some alternatives out there.
In terms of the interest rate they offer, it’s lower than loans, unsecured line of credits, and credit cards, but HELOCs and “normal” mortgages can usually offer you somewhat better rates.
So, we get to the key question: Is it worth paying a higher rate for the extra features that HELOCs and regular mortgages don’t offer? Those are:
- No monthly payments
- You can never lose your home for not making payments as they are no payments at all
- You don’t need any income or a great credit score to qualify for it
The answer to this question is unique for every person, so I wouldn’t be able to answer it for you. It all depends on every person’s unique financial and property situation.
In the end, we went over the main reverse mortgage penalties. In my opinion, the penalties are pretty rational. There are no penalties five years after receiving the reverse mortgage and no penalties if the owners of the property pass away. Additionally, the penalty is halved if the property owners move to a nursing home. These are favorable conditions compared to many other loan products out there.
If you have any questions or concerns about reverse mortgages, make sure to check out our other articles covering different aspects of a reverse mortgage. For everything else, leave us a comment below, and I will answer your queries as soon as possible.
Free Reverse Mortgage Evaluation
I hope you enjoyed this article. If you’d like a free reverse mortgage evaluation, I’d be happy to help you.
With over 20 years experience in mortgages, I can look at your situation and advise you if this is a good fit – or if one of the thousands of other mortgage products I have through the 15+ lenders I work with might be better.
Simply fill out the short application form at: