Reverse Mortgage Rates And Penalties

Reverse mortgage rates and ‘what are your rates’ are very common questions that we get here.

The problem is that rates are particular to an individual.

This is actually also the case for ‘normal’ mortgages – just that most people don’t know this and many sites play a ‘bait and switch‘ type game by advertising really low rates for you only then to find out that you ‘don’t qualify’ for that rate.

However, I would like to put some information out there regarding reverse mortgage rates.

I will also try to keep this regularly updated, so that the rates you see on this page are relatively accurate.

What Are Current Reverse Mortgage Rates

Currently rates are around 4.99-5.79% .  As I mentioned above, the exact rate you get – as well as the amount you are eligible to borrow – will depend on several things:

• Your age
• The loan amount
• The property location

So there is no exact rate that can be quoted here.  However, they will not be too far off 5-6% and have been in this range for a while.

How Do These Rates Compare To Other Products?

Again, the rates of other mortgage products and loans are both constantly changing and depend on what an individual qualifies for (if you qualify for anything at all).

Just now you are looking at around 2.79-3.09% for a standard fixed rate mortgage (this is likely to go up soon though and they might even be around 3.29% by the end of the year), 3.55-4.05% (variable) for a Home Equity Line Of Credit, 7-8% (variable) for a Line Of Credit (unsecured), between 10-15% for a personal loan and higher than this for most credit cards.

Rather than focusing on the specific number, this simple chart shows how rates compare to the other options out there:

How Does This Impact Your Home Equity And Your Net Worth?

The first thing to note – which is something that a lot of people miss or don’t understand – is that both a mortgage and Home Equity Line Of Credit also reduce your net worth.

Many people ignore this fact because they don’t ‘see’ the reduction of their net worth – because the interest is buried into the monthly payment and is paid every month.  Because the interest doesn’t accumulate, they don’t ‘see’ the interest adding up and it is easy to think it isn’t there.

We talk about this and our ‘rule’ you can use in our free reverse mortgage guide.

Here is an example – purely for illustrative purposes only and approximations – of what the differences would be on a $100,000 loan for 5 years:

What About Compounding Interest?

It is important to note that every single mortgage in Canada compounds semi-annually.  A HELOC, on the other hand, compounds monthly.

So the impact of a HELOC interest will be more as it is compounded more regularly.  This is very important to be aware of.

Of course, your home equity growth can offset this interest cost – I’ll examine this further below.

In the meantime, as you can see, the cost of a reverse mortgage is higher than a ‘top’ mortgage or HELOC – but much lower than other options out there.

The best way to think about this is that this additional interest is a price you pay to get access to all the features this product has than a HELOC or top mortgage do not – you don’t need to make any payments, you are guaranteed to live in your home for life and can never lose it and you don’t need income or a top credit score to qualify for it.

So the question you have to ask yourself is: are these features all worth it?

 

What About Your Home Equity?

Another huge misconception is that a reverse mortgage will eat away your home equity.  This is only true if your home does not grow in value at all.

Almost every home in Canada is growing in value just now and close to 100% have been growing in value in the past 5 years.

How much does it need to grow to offset the reverse mortgage cost?  As we mention in our ‘Reverse Mortgage Canada‘ guide, a neat trick is that the approximate amount your home needs to grow is at half of the interest rate.

This is because a reverse mortgage is taken out on up to 55% of your home.  Your home equity growth still compounds on 100% of your home.  So, because the mortgage balance is roughly half the size, your home equity growth only needs to be around half of the interest rate.

If you took out less than 55% of your home value, then your home equity growth can be less than half of the rate and you will still see your home equity growing over time.

To continue our example from above, let’s say your home was worth $250,000 and you took out the $100,000 loan mentioned above. Here is what your home equity growth would be under various scenarios:

As you can see for this example – a $250,000 property and $100,000 reverse mortgage – your home would only need to grow a little more than 2% to offset all of the interest (see the table above for the interest calculation).

And if your home were to grow above 2%, then you would actually gain home equity while having a reverse mortgage in this situation.

This might sound too good to be true, but many Canadians are in this position just now.  In fact, in the hottest areas of Canada, some owners have seen double digit home equity growth over the past 5 years!

 

What About Reverse Mortgage Penalties?

A few people ask us questions about this.  It is rare – because most people are taking this out because they want to live in their home for life and never leave.

However, for some, this can be a short term solution.

The golden rule for reverse mortgage penalties is that if you are paying it off after 5 years, there is no penalty; beyond this the closer you are to 5 years, the lower the penalty will be.

This is actually very similar to the penalty structure of a ‘normal’ mortgage.  And, like with a ‘normal’ mortgage, you can also make what are called ‘prepayments‘.  However, again – like a ‘normal’ mortgage – you only get a certain allowance of these each year – in the case of a reverse mortgage that amount is 10% – meaning you can repay 10% of the balance without penalty every year.

Beyond this, here is how penalties work:

Compared to ‘normal’ mortgages these are pretty similar.    In fact, I have seen some IRD calculations of the ‘big 5 banks’ come out with penalties more than 5% – and that’s in year 3 too.  For more on the penalty rates of ‘normal’ mortgages, I suggest you read this guide.

It is also worth noting that there is absolutely no penalty in the event of the owners passing away and if the reason why you are moving is to move to a nursing home, the penalty is reduced by 50%.

As I mentioned before, there are no penalties after 5 years and up to 10% of the balance can be paid off without penalty every year.

I would say that the first year penalty is on the high end – as far as mortgage penalties go – but beyond that, these penalties are in line with most mortgage products and actually on the lower end compared to the IRD of the big 5 banks fixed rate mortgage products.

 

In Summary – Reverse Mortgage Rates And Penalties

I have outlined how reverse mortgage rates and penalties work, including comparing them to the alternative options out there.

When it comes to interest rate, they are a better option than loans, line of credits (unsecured) and credit cards.  However, Home Equity Line Of Credits (HELOCs) and ‘normal’ mortgages generally have better rates.

So the key question you must ask: is it worth my paying a higher rate to have access to these 3 benefits that a HELOC or ‘normal’ mortgage do not have?  Namely:

• No monthly payments
• You can’t lose your home – ever – for not making payments (since there aren’t any)
• You don’t need income and a great credit score to qualify

The answer to that question will vary from person to person – it is up to you.

Finally, I looked at reverse mortgage penalties and outlined how these work.  I would say that, in my opinion, these penalties are very reasonable and the fact that there is no penalty upon death or after 5 years – as well as a reduced penalty if you have to move to a nursing home – then these are definitely a positive feature of the product, compared to others out there. For more on this check out our article top 8 misconceptions about reverse mortgages.

Got any questions or anything I missed?  Leave a comment below and I’ll answer any queries you have regarding reverse mortgage rates and penalties.

 

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