3 things that affect your reverse mortgage rate in Canada

Reverse mortgages have seen a huge increase in popularity in recent years. Just last year, HomeEquity Bank, Canada’s largest provider of reverse mortgages, reached the $1-billion mark in annual reverse mortgage originations for the first time, marking a 28% increase from the year prior. 

Canadian retirees may be increasingly turning to reverse mortgages as part of their retirement solution. One of the main reasons for the product’s growing popularity is its ability to make up for the income shortfall that many retirees face. It's also typically much simpler to qualify for a reverse mortgage (income and credit score are not qualifying factors), plus, regular mortgage payments are not required. 

However, the average interest rate on a reverse mortgage is a little higher than the lowest conventional mortgage rates available. The reverse mortgage rate available to you can depend on three key factors. 

1. The amount you want to borrow 

Retirement can be financially stressful for many Canadians: the average Canadian retiree has an annual income shortfall of around $20,000. Plus, most Canadians want to stay in their homes during retirement, which rules out downsizing as a means of cashing in equity.  

When you compare reverse mortgage rates, you may discover that different reverse mortgage products have higher interest rates than conventional mortgages.  

When lenders calculate the amount they’ll lend to homeowners, they consider a number of factors, one of the most important being the borrower’s age. The younger you are, the less they will lend. This is to help ensure that you never owe more than your home is worth.  

Certain reverse mortgage products allow for a higher advance, but this comes with a slightly higher interest rate. This type of reverse mortgage allows retirees to cash in up to 55% of the value of their home and spend the money to enable them to have a more comfortable retirement. However, it’s only available in certain urban locations. 

And, because they don’t need to have income to qualify, or make any regular mortgage payments, they get to have a more financially stress-free retirement. 

2. How you want to access the funds  

Certain reverse mortgage products allow you to draw on your home equity in both a lump sum and regular (monthly or quarterly) advances.   

The rates for the lump sum are based on your mortgage term, while the rate for the advances will be the variable rate (typically slightly less than fixed term rates, unless the variable rate increases during the term). If interest rates change and you take out a Subsequent Advance, your reverse mortgage may be subject to a new blended rate.  

3. The length of your mortgage term  

Reverse mortgage rates change depending on your mortgage term. On average, interest rates on a reverse mortgage will be a little higher for a longer term (such as five years) than a short one.  

If you don’t want to be tied down to a set time period, you can apply for a fully flexible open reverse mortgage option. This can be ideal for anyone who wants a short-term reverse mortgage.  

This flexible option allows you to pay off your mortgage fully at any time, without paying a penalty (though interest rates tend to be a little higher than other reverse mortgage options). 

What are the reverse mortgage rates available in Canada? 

Similar to conventional mortgages, reverse mortgages rates can be fixed or variable. Fixed rates are guaranteed for the entire term of your mortgage. Risk-averse borrowers would normally choose a fixed rate. 

A variable rate may be lower than a fixed rate, at least initially. It can, however, rise or fall, depending on the Bank of Canada’s prime rate. 

Conventional mortgages typically have an agreed-upon interest rate and regular mortgage payment requirements, which usually include amounts for both the principal and interest.  

Reverse mortgage interest, however, works a little differently because borrowers don’t have to make regular mortgage payments. This is a key reason for the reverse mortgage’s popularity: it allows you to access your home equity without it having a negative impact on your retirement income.  

Just like on a conventional fixed-rate mortgage, interest accumulates and compounds semi-annually. This means that, after six months, the interest that has built up is added to the total amount owed, and interest is then charged on that cumulative amount. 

A reverse mortgage allows retirees to cash in up to 55% of the appraised value of their home and spend the money to enable them to have a more comfortable retirement. And, because they don’t need to have income to qualify, or make any regular mortgage payments, they get to have a more financially stress-free retirement.