When you get a reverse mortgage, you tap the equity in your home without having to sell it. There are several advantages to having a reverse mortgage, for those who qualify: For one, you gain access to part of the cash value of your home, increasing your liquidity. Setup and legal fees are rolled into the loan amount, and aren’t due until the end of the mortgage (be aware that interest will accrue). And you can remain in your home without having to make monthly loan repayments, as you would with a home equity line of credit or a standard mortgage—so your monthly expenses will not increase as a result. (This article shares additional details and can help you decide if a reverse mortgage is right for you.)
But what happens at the end of a reverse mortgage? A common myth is that the lender can take your home when the loan is due; that isn’t the case. Let’s look at what actually happens.
Three common ways for a reverse mortgage to end
A reverse mortgage usually ends in one of three ways: either the homeowners die; they sell their property and move away; or they move into a retirement residence or long-term care. (Defaulting on the loan is another scenario, which we’ll discuss later.)
When the last surviving homeowner dies
If more than one person owns the home (as in the case of spouses, partners or co-owners), then the reverse mortgage loan is due when the last owner dies. When that has happened, the borrower’s estate has to repay the entire amount of the reverse mortgage—the loan principal, plus interest and fees. Often, the property is sold by the borrower’s heirs, who use the proceeds to pay the amount due, but if they would like to keep the house, they can also choose to use other funds to repay the loan.
When the last surviving homeowner sells
If the homeowner decides to sell, the loan becomes due. It isn’t due immediately upon the death of the last owner. For example, under the terms of an Equitable Bank reverse mortgage, you have 180 days to repay.
When the last surviving homeowner moves into a retirement residence or long-term care facility
If you or your surviving co-owner move into a retirement residence or long-term care, you may have up to a year to repay the reverse mortgage. Make sure you read the fine print and ask your lender about repayment timelines before you commit.
What if the borrower defaults on a reverse mortgage?
You may wonder how a borrower can default if no payments are due until the mortgage ends. In this case, defaulting means:
- Letting your home fall into disrepair, reducing its original value.
- Not paying your property taxes and insurance payments.
- Using the loan money for illegal means.
- Lying on your reverse mortgage application.
If this happens, you could face foreclosure, forcing the sale of your home. The proceeds from the sale would go towards paying off the reverse mortgage debt. Realistically, this is extremely rare and lenders prefer to work with homeowners on alternative solutions so they can stay in their home.
What about heirs?
There is a fear that if seniors take out a reverse mortgage, there won’t be an inheritance left for their children or grandchildren. In fact, when the owner of the home dies or chooses to sell their home, the heirs have two options: they can sell the house, settle the loan with some of the proceeds and keep the rest; or they can settle the loan with other money and keep the home.
Generally speaking, house prices tend to increase, especially in major Canadian cities, so heirs will likely receive some of the money from the sale of the house—but this is not a guarantee as the housing market can fluctuate.
The way reverse mortgages come to an end depends upon the homeowner’s circumstances, such as a sale, death, or if they decide to repay early (for example, if you come into money, you could pay back part or all of the loan ahead of time, but you may need to pay a prepayment charge). A reverse mortgage is tailored so you can remain in your home and your heirs can receive some monetary value when the time comes.
As with any financial decision, it’s important to get the facts before you lock in. Is a reverse mortgage right for you? Check out this article for a walk through the life circumstances in which a reverse mortgage might make sense.