Reverse mortgage or downsize in Ontario: how to choose

If you are weighing a reverse mortgage or downsize decision in Waterloo, Kitchener, Cambridge or the townships, start with the question underneath it: do you want to stay in this house, or do you just need money? Waterloo Downsizing is built for people who decide to move, and introductions from this site go to agents on the operating team at eXp Realty, so it is not a search of the whole market and we do not claim to be neutral. That is why the borrowing side below relies on the federal consumer agency, not on us.

This guide is general information, not legal, tax or financial advice. Product terms vary by lender and change. Get independent legal advice and independent financial advice before you sign anything, and ask an accountant about tax.

What a reverse mortgage does and what downsizing does

A reverse mortgage is a loan secured by your home. You stay in the house, you receive money and you generally make no regular payments. The debt grows because interest is added to it, and it is repaid later from the home.

Downsizing is a sale and a purchase. You sell, pay the costs of selling, buy or rent something smaller, and keep the difference. The debt question usually goes away, and so does the house. If you want to see what that difference might look like, run the net proceeds calculator or read how to estimate net proceeds.

Neither route is a safe default. A reverse mortgage that suits one household can be a poor fit for another, and a sale that frees a lot of equity can still leave you with a home that does not work. The useful comparison is between what each choice costs, what it leaves you with and how hard it is to undo.

Reverse mortgage in Ontario: what FCAC says

The FCAC's reverse mortgage page sets out the basics. The points below come from that page.

• Who: usually homeowners aged 55 and older. The home generally has to be your primary residence.
• How much: usually up to 55% of the home's value. The maximum depends on your age, the ages of other people on title, the home's type, condition and appraised value, and the lender.
• Payments: none are required. You may be able to make optional payments, or repay in full at any time, possibly with a prepayment penalty.
• Getting the money: as a lump sum, a partial lump sum with later instalments, or regular payments. Take a lump sum and you pay interest on all of it from the start, even if you have not spent it.
• Who offers it: FCAC names HomeEquity Bank and Equitable Bank as federally regulated institutions, and says provincially regulated lenders and mortgage brokers also offer reverse mortgages. It says federally regulated lenders are covered by the Financial Consumer Protection Framework.

Costs, interest, equity and when it is repaid

FCAC says reverse mortgage interest rates are higher than rates on a regular mortgage or a home equity line of credit. The lender adds the interest to your balance, so what you owe rises over time and your equity shrinks. FCAC also lists costs that vary by lender: a home appraisal, set-up fees, prepayment penalties, legal fees and closing fees. Some can be added to the balance and others are paid up front.

Because the balance grows, ask the lender for a written illustration using your age and your home's value, showing the balance after several different periods. Ask a lawyer to explain it before you sign.

When it has to be repaid

FCAC says the loan is repaid in full when you sell the home, move out, the last borrower dies or you default. Moving out is a trigger even if you intend to keep the house, so ask the lender what counts as moving out. FCAC also warns that an estate must repay within set timeframes and that settling an estate can take longer than the lender allows. That is a conversation to have with your family now, not after the fact. See helping a parent downsize if the decision involves adult children.

A few practical questions follow from FCAC's description. Who is on title, and how old are they? FCAC says the maximum depends on the ages of other title holders, so a younger spouse can change the amount. Do you plan to spend winters elsewhere or move into care at some point? The home generally has to be your primary residence. And do you want to leave the house or its value to someone? Interest that builds up reduces what is left, which FCAC lists as a disadvantage.

Reverse mortgage, OAS and GIS

FCAC states that money from a reverse mortgage is tax-free and does not affect your Old Age Security (OAS) or Guaranteed Income Supplement (GIS). That is one of the reasons people look at it. It is not a reason to ignore the cost: a benefit that is unaffected does not make the loan cheaper.

Selling is a different path. If you invest the proceeds, the income that investments earn is part of your income in the usual way, and OAS and GIS are both tied to income. The sell and rent guide covers that side in more detail.

HELOC and other ways to borrow against your home

FCAC's page on borrowing against home equity compares four products, and it is worth reading all of it.

• HELOC: a credit limit of up to 65% of the appraised value, a variable interest rate, and the ability to borrow, repay and borrow again. Your home secures it, so FCAC notes foreclosure is possible if you cannot repay.
• Home equity loan: up to 80% of the home's value less your existing mortgage, paid as a lump sum and repaid on a fixed schedule.
• Second mortgage: also up to 80% less your first mortgage, with a rate FCAC says is generally higher than on a first mortgage.
• Reverse mortgage: the one above.

The main practical difference is payments. A HELOC and a home equity loan need regular payments, so they depend on your income now and later. A reverse mortgage does not, at the cost of a growing balance. FCAC lists appraisal, title search, title insurance and legal fees as costs on the equity products.

What selling and buying smaller costs in Ontario

Selling is not free either. The CRA's moving expense page lists the costs of selling a home as including legal or notary fees, real estate commission and mortgage penalties. The CRA also says a registered agent charges GST/HST on the commission. Ask for a quote on each cost before you decide, and see Costs and Taxes for the full list.

Ontario's land transfer tax is paid by the buyer when the purchase closes, so it applies to the home you buy, not the one you sell. The province's rates are 0.5% up to $55,000, 1% from $55,000 to $250,000, 1.5% from $250,000 to $400,000 and 2% above $400,000. Only Toronto adds its own municipal tax, so there is none in Waterloo, Kitchener or Cambridge. Worked examples:

• A $250,000 purchase: $2,225
• A $400,000 purchase: $4,475
• A $600,000 purchase: $8,475
• A $900,000 purchase: $14,475

On income tax, the CRA's principal residence page says you must report the sale and designate the home on your return to claim the exemption, even if the gain is fully exempt. If the home was your principal residence for the years you owned it, the exemption can cover the gain, but an accountant should confirm your situation. The same exemption does not apply to a second property such as a cottage.

Selling and buying smaller also leaves you with a choice of home types, and each has different costs. A bungalow, a townhouse, a condominium with common expenses and a life lease are not the same thing. Read buying a condo in Waterloo Region and the home type comparison before you assume the smaller home costs less to run.

Reverse mortgage vs selling your home: a comparison

The right-hand column is the only one that changes how you live. The other two change what you owe. If the house itself is the problem, with stairs, upkeep or snow, borrowing leaves the problem in place. The aging in place guide looks at what can be fixed in place and what cannot.

A decision checklist

• Name the problem: cash flow, a one-time expense, upkeep, stairs or being near family.
• Ask a lender for a written reverse mortgage illustration for your age and home, with every fee listed.
• Ask a lawyer how repayment would work if you move into a retirement home or if the home passes to your estate.
• Run the net proceeds numbers, including selling costs and land transfer tax on a purchase at your target price.
• Speak to an accountant about the principal residence exemption and reporting the sale.
• Tell your family and your power of attorney what you are considering, and why.
• If you are staying, check property tax relief and the credits in the aging in place guide before borrowing.
• Get independent legal advice and independent financial advice, each from someone who earns nothing from the product.

The advice should be independent for a reason. A lender or a broker earns something if you take the product, and an agent earns something if you sell. A lawyer you pay by the hour and a financial adviser who does not sell the product are in a better position to say no. FCAC's own advice is to talk with a financial adviser, your family and independent legal counsel before going ahead.

If borrowing makes sense, FCAC's pages are the place to start, followed by a lawyer and a financial adviser. If selling does, you can compare homes in the neighbourhood guides, read about buying first or selling first and look at adult lifestyle communities. Local help is on the resources page. If you want an introduction to an agent, you can ask to be matched.