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The Advent of Reverse Mortgages 

Chances are that if you own a home, you have had a mortgage at some point in your life; if not, well done. What you may be less familiar with is the idea of reverse mortgages. Before delving into this, some context is warranted.  

Conventional Mortgage 

The conventional mortgage involves a financial institution (usually a bank) partially financing  one’s home purchase. In other words, one’s funds are combined with a financial institution’s funds to purchase a property. The security for the financing institution is usually the subject property to be purchased. The result is that ownership is vested in the purchaser, and the financing institution’s interest is registered against the property as a mortgage/charge, thereby almost guaranteeing the financing institution’s funds will be paid at some point.1

The purchaser, now being the mortgagor/chargor, pays a scheduled amount based on the terms of the mortgage until such time as the mortgage is paid. Qualification for a mortgage is premised on several factors, including present day regulations on acceptable debt ratios, and the quality of the borrower’s situation, such as income, available down payment, credit worthiness, amount of debt, etc. 

This relationship between the mortgagor (borrower) and mortgagee (financial institution) is governed by the Mortgages Act2 in Ontario, which outlines the rights and obligations of mortgagees and mortgagors, among other matters related to mortgages.  

Reverse Mortgage

It is trite to say, but Canada has a large proportion of its population in an “older” bracket3; and this trend will continue for some time.  

So, what does this have to do with reverse mortgages? Recall that conventional mortgages require scheduled payments, and the qualification partially depends on income. For older borrowers, especially those retired with no employment income, they turn to the equity they have built in their home; that is, the value of the home that belongs to them, and not the bank by way of a mortgage.  

With a reverse mortgage, a financing institution will register its interest as a mortgage/charge against the borrower’s subject property. There are no mortgage payments (recall that owners are likely retired, and have a fixed income not generated from employment). The amount owing, being the original principle amount, plus the blended principle and interest payments, and other ancillary costs, is paid as a lump sum when the borrower sells the property (or when a borrower passes away or defaults). The financing institution’s mortgage/charge increases, or escalates, with time because all costs relating to the mortgage/charge accumulates.  

Pros and Cons of a Reverse Mortgage, and Conclusion 

The advantages include the postponement of payments and the qualification for the mortgage without the necessary employment income, among others. The disadvantages involve potentially higher interest charges and the requirement by the financial institution to consolidate other debts into the reverse mortgage. 4  

While unusual, reverse mortgages are, in essence, what every mortgage/charge is: security for an outstanding loan. It is a creative solution that is addressing, and will continue to address, financial needs of aging retired homeowners with significant equity in their home.