With the cost of living quickly rising, you may have less cash on hand for necessary expenses, such as home repairs, renovations, or bill payments. While that may be a cause for concern, a reverse mortgage can allow you to access tax-free cash from your home so that you can rest easy about your finances.
Although the interest rates for conventional mortgages, reverse mortgages, and lines of credit have increased recently, some reverse mortgage rate options are now closer than ever to that of a conventional mortgage.
Here’s what you need to know about reverse mortgages and conventional mortgage interest rates.
What is a reverse mortgage?
A reverse mortgage is a way to access tax-free cash from the value of your home without selling or moving. If you are a Canadian homeowner aged 55 and older, you can borrow up to 55% of the current appraised value of your home tax-free.
The money obtained from your loan can be used for anything you want, including:
- Paying for home repairs
- Paying down debts
- Helping loved ones financially, such as with a down payment for their home
- Covering your cost of living
The maximum amount you can borrow depends on your lender, your age, and the appraised value of your home. The lender will also consider:
- The age of all individuals registered on your home’s title
- Where you live
- Your home’s condition
Additionally, a reverse mortgage can only be obtained by taking out a loan on your primary residence, so you typically have to live in the home you’re borrowing against for at least six months out of each year.
The reverse mortgage is paid back when you move out of the house, sell the house, or the last borrower dies, meaning you don’t have to make any monthly mortgage payments on your loan until it’s due.
What do conventional and reverse mortgage interest rates have in common?
With both types of mortgages, you have a choice between:
- A fixed interest rate, in which your interest rate, stays the same for the length of your mortgage term, or
- A variable interest rate, in which your interest rate varies based on changes to the lender’s mortgage prime rate.
How reverse mortgage interest rates work
Reverse mortgage interest rates are slightly higher than conventional mortgage interest rates or lines of credit because:
- No regular principal payments are required
- No regular interest payments are required
- No minimum income qualifications
- No credit score qualifications
Also, you will never have to pay more on your reverse mortgage than the fair market value of your home.
With the no negative equity guarantee, this means that if the value of your home suddenly drops when your loan is due, the lender will cover the difference between the market value of your home and the loan amount.
While interest rates on reverse mortgages tend to be higher than conventional mortgages, the gap between the two is much narrower, thanks to the special rate that is offered by reverse mortgage lenders.
This means that the interest rate differential between reverse mortgages and conventional mortgages is very close.
How conventional mortgage rates work
Individual lenders set interest rates for conventional mortgages, but when one bank’s prime rate moves, the others tend to follow.
All are usually based on the Bank of Canada’s overnight target rate (which is the rate banks borrow money from the Bank of Canada). As the Bank of Canada’s rate increases, individual mortgage lenders will also increase their rates.
In recent months, traditional lenders have increased their rates, so their mortgage rates are now very close to the special rates of reverse mortgage lenders.
The bottom line
With the recent rise in interest rates, the gap between reverse mortgage interest rates and conventional mortgage interest rates is closing.
This makes reverse mortgages an attractive solution for Canadian homeowners who need to access money in retirement, especially since no monthly mortgage payments are required until you choose to move or sell your home.