Reverse Mortgage

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Costs And Fees For A Reverse Mortgage

Quite often we get asked the question about what hidden or buried costs there are in a reverse mortgage.

This is largely because the whole product can come across of having a feeling of being too good to be true.  Being sceptical like this is a good thing considering how many financial products out there bury their costs or have hidden fees that you don’t learn about until it is too late.

Today, in response to many of the queries on this, I thought I’d go through all the costs involved in setting this up.

That is, the initial costs before you do anything else.

This will include every single cost you need to know about – you can factor these into your decision.

The best way to think about reverse mortgage costs are to split them between costs that must be paid upfront (by you) and costs that deducted from the amount you borrow (you don’t actually pay these yourself):

1. Costs You Pay Upfront – Out Of Pocket Costs: $150-400

Let me first clarify what I mean by ‘out of pocket’.

This means that you have to pay these costs upfront and there is no other option or way to pay them.  The phrase – for those not familiar with it – comes from taking the cash out of your pocket and giving it to someone.

So what ‘out of pocket’ costs are there?

Well, the good news is that there is only one: the appraisal.

Appraisal costs will depend on where you are in Canada but you are talking about something in the range of $150-400 – with most coming close to the $300 range.

Why is an appraisal required?

Well you have to remember that the lender isn’t going to take any payments from you.  They are lending solely on the basis that they believe your home will continue to grow in value and that they’d like a share of that value.

This is from a lenders perspective – ownership of many homes across Canada.  So they absolutely must ensure that your home is a good investment for them.

So, this means that they must appraise your home.  A home appraiser is looking for 3 things:

• What is the house worth based on current market value?
• Any issues that they should be aware of that might impede future home value growth?
• The marketability of the home – that is how easy would it be to sell it (if they needed to) once the homeowners passed away?

Like anything, there is good news and bad news about this:

The good news?  This is the only upfront cost you actually have to pay (by cash or credit card).

The bad news?  This cost is payable even if you later decide not to take out the mortgage.  Unfortunately, there are no refunds on this.

What my suggestion would be is that if you have paid for an appraisal, but no longer wish to pursue this, that you try to use it to secure a ‘regular’ mortgage or Home Equity Line Of Credit – usually either of these will need an appraisal anyway (especially if you are refinancing).

2. Costs You Have To Pay But That Are Deducted From The Amount Borrowed

These costs – rather than being upfront costs that you have to pay out of your own pocket – can be deducted from the amount that you receive.

So lets say you arrange a reverse mortgage for $150,000 and these costs are $2,000.  Then you will receive $148,000 instead.

You can choose to pay them if you like but almost every single person chooses to have them deducted from the amount borrowed instead.

These are split between two different sets of legal costs:

a. Independent legal advice: $450-700

There are two aspects to legal fees that you are looking at:

• Legally registering the mortgage on title.  We will come to this in part b.
• Independent legal advice – unlike the above element, this is a requirement of the lender and is a very important one. It ensures that you don’t sign anything or feel like you were ‘pushed’ into this product without consulting an independent legal expert.

Like appraisals, legal fees vary across Canada and from lawyer to lawyer.  While $450 to $700 covers all ranges, generally they are around $600.

Remember: you don’t actually pay these upfront though – they are deducted from the amount you borrow.

b.  Legal, administrative and set-up costs: $1,495

These are with regards to the legal cost of registering of the mortgage on title.

Every single mortgage in the whole of Canada incurs this cost.

It is unavoidable – part of our mortgage laws.  Whether you are getting a Home Equity Line Of Credit (HELOC), ‘normal’ mortgage or reverse mortgage – you must pay a lawyer to register the mortgage on title – regardless of what type of mortgage you are getting.

A lot of people forget when they first bought a home that they incurred these costs and had to involve a lawyer – as a reverse mortgage is still technically a mortgage, a lawyer must be involved to place the mortgage on title.

Again – like independent legal advice – these costs are deducted from the amount that you receive.

In Summary – Reverse Mortgage Costs And Fees

That is it – there are no other fees or costs involved in setting up a reverse mortgage in Canada.

While the amounts can vary (it is really hard to predict what appraisals or lawyers will cost as they vary widely from province to province, city to city and lawyer to lawyer) –  these are all the costs at this point in time.

And remember, in terms of upfront costs that you actually have to pay in cash (or by credit  card) you are only talking around $150-400.

Here is a short table to summarize the costs/fees:

It should also be noted that costs and fees for setting up this are very similar to the alternatives out there.  For more on this, see this article we wrote:
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Most people are usually considering a Home Equity Line Of Credit – which comes with almost identical set-up costs (minus the administrative fee – although some lenders do charge set-up fees). See our article comparing this to a HELOC for more on this:

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As always, if you have any questions regarding reverse mortgage costs and fees then feel free to leave a comment below.

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Alternatives To A Reverse Mortgage

Before I examine the alternatives to a reverse mortgage, I should reveal that I think a reverse mortgage is a fantastic product, especially in today’s age where many people find themselves to be ‘house rich’ but ‘cash poor’.

But do I think it the best solution for absolutely everyone?  Of course not.

Are there alternatives out there?  Yes.

Are the alternatives any good?  Let’s take a look…

So today I thought I’d examine some of the alternatives that you should consider while making your decision.

1. A Home Equity Line Of Credit (HELOC)

I would start with this as it is without a doubt the alternative option that we hear from the most.

A home equity line of credit is essentially a ‘revolving’ loan which you can dip into at any time.

For example, let’s say the lender gives you a HELOC of $50,000.

You can take as much or as little of the $50,000 as you like.  If you take out $0, you pay $0 in interest.  But any amounts you do take out are subject to interest.

The most obvious benefit of this product is flexibility – you can take out as little as you like and pay back as much as you want, when you want.

You can pay back 100% of what you took out and minimize the amount of interest you will pay.

Product Comparisons

We have already actually written a detailed article about how you can combine the best of both products into a Reverse Mortgage Line Of Credit.

In addition to this, I will take a look at the differences between this and a Home Equity Line Of Credit:

1. – A HELOC is more flexible – as I mentioned above you can put money in and take it out at will. You can pay off the entire loan with no penalty whenever you like – unlike a reverse mortgage, where penalties apply in the first 5 years of the loan.
2. – Another advantage is that rates for a HELOC are generally at slightly lower rates. So you save a little on the interest rate.
3. – However, a HELOC requires monthly interest payments of the minimum amount. No payments are required for a reverse mortgage.
4. – In addition to this, a HELOC is still a conventional loan that you need to qualify for (your income and credit score will be assessed as part of this). This is not the case with a reverse mortgage.
5. – Finally, a HELOC could ultimately lead to you losing your home if you don’t keep up with payments. This is also not the case with a reverse mortgage, as no payments are required so you can never lose your home.  Ever.

Who Is This A Good Alternative For?

This is the best alternative for those who are just needing short-term cash or to have access to a ‘rainy day fund’.

The reason is because of it’s flexibility – since you only need it for a short-term or emergency basis, you can dip in and out of it when you like.

If you have enough regular income and are not struggling, this might suit you; for those who need the cash for longer-term purposes, a reverse mortgage might be a better solution.

2. Sell Your Home

Easily the 2^nd most common alternative is selling your home.

Like a HELOC, we often have clients who are considering this as another option.

This one doesn’t need much explanation and is hard for us to advise you on.  However, there are some considerations that you need to make:

1. – Where are you going to live and what will the cost of this be?
2. – How does this cost compare to a reverse mortgage, HELOC or other alternatives (see below)?
3. – Are you physically able to stay in your home and maintain it? This is a very common reason for seniors looking to move.
4. – Would moving out of your home make your life better or worse?
5. – How valuable is your home to you emotionally – not financially?

Product Comparison

Since selling your home isn’t really a financial product, you can’t really make an apples to apples comparison.

However, from a financial perspective, let me raise a few things to consider:

1. – Selling your home would see you ‘withdraw’ all the equity you currently have – where as a reverse mortgage could eat into that (in 99% of cases it does not).
2. – However, you also lose out on future appreciation of your home – it is itself an investment and you are selling that investment and giving up any future returns (house price gains). Often these house price gains are more than the reverse mortgage costs – so you are giving up a profitable investment asset.
3. – In addition to this, selling your home is not free and the going commission rate in most of Canada just now is around 5%. So you are giving away 5% of the value of your home off the bat – with no house price growth or anything to offset this loss.

Who Is This A Good Alternative For?

Sometimes people get to a stage where they aren’t physically able to maintain their home – so either downsizing into a condo or renting a condo can be a good idea.

In addition to this, there are a few people who aren’t emotionally attached to their home – or maybe even own 2^nd homes (which are not eligible for a reverse mortgage).  This would be a good alternative for them.

 

3. A Regular Mortgage (Or Mortgage Refinance)

The final – but least considered alternative – is a ‘regular’ or traditional mortgage.

Included in this would be a mortgage refinance – where you increase the amount of the mortgage and take out some more equity.

The reason why so few of our clients consider this is that some of them already hold a regular mortgage on their home and they are looking to get rid of it – not consider it as an alternative!

Others spent years paying off the mortgage and the thought of putting it back on there and having to make those monthly payments again sends shivers down their spine.

However, for those who do not have a mortgage already, it is another way to get equity out of your home.

Product Comparison

Many of the points above – regarding a HELOC – apply for a conventional mortgage.

However, it is not quite as flexible as a HELOC.  There are a few other considerations for this too:

1. – With regards to rate, assuming you have reasonable income and a good credit score, this is going to be the lowest interest rate out of any of the alternatives – lower than both a HELOC and reverse mortgage.
2. – The other features of the mortgage are going to be very similar – penalties for early payment and restrictions about how much of the balance you can pay off though.
3. – However, this is probably the least flexible of the 3 options. In addition to this, you will be required to make monthly payments and you also need to qualify for it (like a HELOC).
4. – A mortgage refinance is also capped to 80% of the property value by law.
5. – Finally, you could lose your home for not keeping up with payments – unlike a reverse mortgage where you are secured from losing your home by the legal contract.

Who Is This A Good Alternative For?

The catch with a conventional mortgage is that the people who it is a good alternative for don’t really need it!

That is, if you have steady income, a good credit rating and a low mortgage balance (or zero mortgage balance) then this is a good alternative for you – except that you probably don’t actually need the cash.

The most likely candidate for this is someone who can simply go through a mortgage refinance and take more money out of their home, increasing their mortgage balance in the process.

Of course, this means higher monthly mortgage payments and paying more interest on your mortgage anyway – but for some people this is not a problem and a good alternative.

In Summary – Reverse Mortgage Alternatives

In this article we summarized the 3 most common alternatives that people consider.  For a more information on the product itself – please download our free guide.

In addition to this, it is also worth considering the difference in costs between these products – something we talk about in more detail in our article reverse mortgage costs and fees.

Did we miss anything?  If that’s the case, and there is an alternative to a reverse mortgage that you are considering, leave a comment below and we’ll give you a response.

 

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Reverse Mortgage In Canada

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