Costs and Interest Rates

Understanding Reverse Mortgage Rates and Costs

Much like every other type of mortgage, a reverse mortgage has setup costs at the initial stage, interest charges on an ongoing basis, withdrawal fees (with select lenders) and penalties for early termination.

Setup Costs

While rates are the biggest cost to consider, borrowers have these costs below to consider:

• Appraisal Costs: $150-$400 depending on your location. Currently, they range around $350 and you may be required to pay for these prior to closing the paperwork.

  • Don’t forget, we cover up to $400 of your appraisal costs.

• Legal Fees: $450-$1,000 depending on the lawyer you choose, of course. Currently, you can expect fees around $600.

  • Independent Legal Advice is critical to ensure you are comfortable with your decision. This is one of my favourite aspects of reverse mortgages because it provides an extra layer of protection for seniors when making such a big decision.

  • These costs are often deferred to the end of the process and reduce the balance you receive.

• Legal, Administrative and Lender Closing Fees: $1,195-$2,995 varies based on the lender you choose to work with.

  • Since I specialize in reverse mortgages, I am generally able to negotiate better rates with my network of lenders. Just like any other negotiation, the more you borrow, the more savings I can push for.

• Ongoing administrative charges: $0-$50 for future lump-sump withdrawals.

  • These fees are intended to cover administrative costs for borrowers that intend to take out larger sums of money when they need it in the future. It does not apply to every reverse mortgage.

Reverse Mortgage Interest Rates

Reverse mortgage rates are currently ranging from 6.69% to 9.40%, with standard 5-year fixed rates hovering around 6.69% - 6.99%. The specific reverse mortgage cost depends on several key factors:

• Borrower's age

• Selected lender

• Loan amount

• Property location

• Mortgage term and size

• Rate type (fixed or variable)

• Lender promotions

Compared to other financial products, reverse mortgage rates are fairly competitive:

• Traditional 5-year fixed mortgage rates: 4.49% - 5.49%

• Home Equity Line of Credit (HELOC): 6.45% - 7.95%

• Reverse Mortgage: 6.69% - 6.99%

• Unsecured Line of Credit: 9% - 12%

• Personal loans: 10% - 20%

• Credit cards: Often higher

As a general trend, reverse mortgage rates are around 2% higher than prime mortgage rates but lower than many alternative financing options.

*the rates above fluctuate with the market and are only meant to show the difference between each type of loan

Renewal Interest Rates

When the initial term of the reverse mortgage ends, typically after 5 years, the reverse mortgage needs to be renewed just like every other mortgage. Depending on a number of factors, the premium charged can range from 0.3% to 2% higher than the current rate at the time of renewal. For example, if rates stay the same in 5 years, the renewal rate would be 6.99%-8.69%. If interest rates decrease in the next 5 years (which is to be expected as we are still seeing higher rates than normal from 5 years ago) then the renewal rate will be decreased as well.

Impact on Home Equity

A critical consideration in reverse mortgage cost is its effect on home equity. Contrary to common misconceptions, a reverse mortgage doesn't necessarily reduce home equity and might be a better alternative to downsizing. The example below illustrates this:

• For a $500,000 home growing at 3% annually with a $200,000 reverse mortgage at 6.69%

  • Annual home appreciation = $15,000

  • Annual interest = $13,604

• Of course, the difference between appreciation and interest would be even higher if you take out less money or home values grow anywhere similar to the last 15 years (ex. the average home grew 3,400% in Toronto since March of 2010)

Early Payment/Ending Fees

Reverse mortgages have penalties for early termination much like most other mortgages. These penalties follow a predictable structure across all lenders. The rates decrease the longer you stay in your reverse mortgage. Below are they penalties, depending on the lender you choose:

• Year 1: 4-5% interest penalty

• Year 2: 3-4% interest penalty

• Year 3: 2-3% interest penalty

• Years 4-10: 3 months interest

• Year 10+: No penalties

Key Takeaways on Reverse Mortgage Cost

• Rates range 6.69% - 9.40%

• Home appreciation can offset interest

• Setup costs range from $1,645 - $4,395 ($1,645 assumes you take advantage of our appraisal fee coverage program)

• Penalties decrease over time

• Unique benefits may justify slightly higher rates

Recommended Next Steps

1. Use online resources to understand reverse mortgage (a good read is our Pros & Cons article)

2. Consult a mortgage expert for free and impartial advice

3. Request quotes from multiple lenders

4. Analyze personal financial situation

5. Consider long-term home value projections

Conclusion

Reverse mortgage costs are nuanced and depend on individual circumstances. While rates are higher than traditional mortgages, the unique benefits and potential for home equity preservation make them an attractive option for many seniors seeking financial flexibility.

Potential borrowers should conduct thorough research, understand the complete cost structure, and consult financial professionals to make informed decisions about reverse mortgage investments.

Free Professional Consultation

If you have any unanswered questions, uncertainties or would like to go over your specific financial needs and goals, please contact me at mike.a@reversemortgageportal.ca to set up a call. As a CPA, Chartered Professional Accountant, of over 20 years, I know the importance of understanding the full picture before making recommendations. I look forward to learning more about you and your financial needs so I can help you make the best decision.

Don’t forget to ask about our $400 rebate!