Reverse Mortgages: Canada vs. U.S.


A reverse mortgage can be a good way for seniors to access some the equity invested in their home. With a reverse mortgage, a homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. Unlike a forward mortgage—the type used to buy a home—a reverse mortgage doesn’t require the homeowner to make any loan payments. Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.

It’s been possible to get a reverse mortgage in either the U.S. or Canada for more than 30 years. And in most respects, reverse mortgages are the same no matter which side of the border you are on. There are some differences, however, that might affect your eligibility and the amount you can borrow. In this guide, we’ll explain these differences.

There are three types of reverse mortgage in the U.S. The most common is the home equity conversion mortgage (HECM). HECMs represent almost all the reverse mortgages that lenders offer on home values below $970,800 in the U.S., so that’s the type that this article will discuss. If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.

  • Reverse mortgages are available in both the U.S. and Canada—with some small differences in how these work in the two countries. 
  • Canada’s age limit for a reverse mortgage is 55, whereas in the U.S. it’s 62. 
  • Canada allows you to borrow up to 55% of your home’s value, whereas in the U.S. the maximum amount you can borrow depends on the age of the youngest borrower as well as interest rates.
  • These differences probably will not have much impact on the average homeowner. While it’s possible to sell your existing home, pay back your reverse mortgage, and take out another in Canada (or vice versa), do so and you may lose money to origination costs.

Reverse Mortgages: The Key Differences Between Canada and the U.S.

In most respects, reverse mortgages in Canada and the U.S. are very similar. However, there are a few key differences in terms of lending standard, eligibility, and the amount you can borrow on a reverse mortgage. Here they are.

Lending Standards

There is a broad consensus that lending standards in Canada are stricter than in the U.S. However, it is difficult to compare foreclosure rates between the two markets.

This is due, in part, to the different ways in which the secondary mortgage market operates in each country. In the U.S., thanks to the repeal of the Glass-Steagall Act in the 1990s, retail banks are allowed to sell their mortgages to third parties as investments. This acts as an incentive to issue large numbers of reverse mortgages and was one of the causes of the 2008 housing (and then broader) crisis.

Canada, on the other hand, has no market for private mortgage-backed securities. Instead, there are just two financial institutions that offer reverse mortgages in Canada, and these institutions have no incentive to issue loans that cannot be paid back. HomeEquity Bank offers CHIP (previously known as the Canadian Home Income Plan) which is available across Canada, either directly from HomeEquity Bank or through mortgage brokers, and Equitable Bank offers a reverse mortgage in some major urban centers.

Eligibility

The second big difference between reverse mortgages in Canada and the U.S. is when it comes to eligibility. The primary difference here is to do with the age requirement for reverse mortgages. In the U.S., you must be 62 years old to take out a reverse mortgage. In Canada, that age is lower—you can get a reverse mortgage in Canada at age 55. 

There are some differences about who can be a borrower on the reverse mortgage, as well. In Canada, if you want to take out a reverse mortgage on a property, everyone listed on the title of the property must be above 55. This means that if a couple lives together, they will have to wait until both partners are 55 before they can take out a reverse mortgage.

How Much You Can Borrow

The final key difference between reverse mortgages in Canada vs. those in the U.S. is how much you can borrow. In Canada, a reverse mortgage can represent 55% of the home’s current value.

In the U.S., the situation is a little more complicated. How much you can actually borrow is based on what’s called the initial principal limit. For 2022, the FHA-insured HECM maximum claim amount, or maximum initial principal limit, has increased to $970,800 from $822,375.

In principle, this means that you can borrow more of the value of your home in the U.S. in comparison to Canada. But in practice, your age will have more of an effect on this amount than moving countries will.

How Much Can You Borrow on a Reverse Mortgage in Canada?

The limit for a reverse mortgage in Canada is 55% of your home’s value. The corresponding figure in the U.S. depends on your age, but the average is about 58% of the home’s value.

Should I Move To Canada for a Reverse Mortgage?

Probably not. The differences between reverse mortgages in Canada and the U.S. are quite small, and unlikely to make much of a difference to the average homeowner.

Are There Alternatives to a Reverse Mortgage?

Yes. In both the U.S. and Canada you may be able to take a cash-out refinance or a home equity loan. Either may allow you to access the equity in your home in a more cost-effective way than a reverse mortgage.

The Bottom Line

It’s possible to get a reverse mortgage in either the U.S. or Canada. There are some small differences between the way that these work in the two countries. In Canada, the age limit for a reverse mortgage is 55, whereas in the U.S. it’s 62. In Canada, you can borrow up to 55% of your home’s value, whereas in the U.S. the maximum amount you can borrow depends on your age.

These differences are unlikely to make a big impact on the average homeowner. While it’s possible to sell your existing home, pay back your reverse mortgage, and take out another in Canada (or vice versa), take this route and you are likely to lose money to origination costs.



Source link

Leave a Reply