Reverse Mortgage After Death in Ontario: What the Estate Must Do

If you have inherited, or expect to deal with, a home that carries a reverse mortgage, the key difference from an ordinary mortgage is that no one has been making regular payments. The debt has been growing quietly, and the borrower's death is a trigger for repayment.

This article explains what that means for the estate: when the balance is due, what is owed, who is responsible, and the usual ways families deal with it. The details depend on your lender and contract, so read the documents and get legal advice.

When does a reverse mortgage have to be repaid?

The Financial Consumer Agency of Canada says a reverse mortgage balance becomes due when the borrower sells, moves out, defaults or dies. The estate usually has limited time to repay, and each lender sets its own timing policy.

There is no single Ontario number of days that applies to every lender. Do not rely on figures you may see from other countries, because they do not apply here. Contact the lender promptly, ask in writing what its timing policy is, and ask what it will accept as proof of who is authorized to act for the estate.

What does the estate owe?

A reverse mortgage requires no regular payments, and the lender adds interest costs, and often fees, to the balance. Because the interest is added instead of paid, the amount owed can be much larger than the original advance. The borrower may usually borrow up to 55% of the home's current value. Prepayment fees may apply.

Ask the lender for a written payout statement showing the principal advanced, interest, fees and any prepayment charges. Compare it with the home's current market value so you know whether the sale is likely to cover the debt. What happens if the home is worth less than the balance depends on the contract, so have a lawyer review it.

Who deals with the lender and the home

Ontario says an estate trustee is the only person with legal authority to manage or distribute an estate. The estate trustee winds up the deceased's affairs, including paying debts, collecting assets and distributing the residue. One fundamental duty is to ascertain and pay the estate's debts and liabilities.

For estate land transfers, a certificate of appointment, or an order confirming the appointment, is listed as an item required in an estate registration. Ontario says an estate normally must be probated if the deceased owned real property. In practice this means an heir cannot simply sell the house on their own, even if everyone agrees.

Heirs who occupy the home should be careful. Whether a beneficiary who is allowed to live in an estate home holds a life interest or only a personal licence depends on the will's wording and the surrounding circumstances. Get advice before moving in or out, or making repairs.

Options: sell, refinance or pay it out

• Sell the home. The estate trustee sells and the lender is repaid from the proceeds. A buyer from an estate trustee who has a power of sale takes the property free of the deceased's debts if the buyer is a bona fide purchaser for value and the required affidavit is supplied.
• Refinance. A beneficiary who wants to keep the home may be able to replace the reverse mortgage with another loan, but the new lender decides whether to lend.
• Pay it out from other funds. Estate cash or a beneficiary's own money can be used to clear the balance, and prepayment fees may apply.

Ontario values real estate for Estate Administration Tax at its appraised value on the date of death, less encumbrances such as a mortgage or lien. That tax is $15 for every $1,000 (or part thereof) of estate value over $50,000 for certificates applied for on or after January 1, 2020. Confirm the current rate when you apply. An Estate Information Return must be filed within 180 calendar days of receiving the certificate.

Dividing the home in specie to beneficiaries without a court order can leave it subject to the deceased's debts for three years. Settling the reverse mortgage first avoids that.

Tax points when the home is sold

The deceased is treated as having sold each capital property immediately before death for its fair market value. The principal residence designation applies only until the date of death, and the legal representative must still designate it on the final return using Schedule 3 and Form T1255, even if the whole gain is exempt. If the estate sells afterward, the gain is reported on the T3 return, generally as the sale price minus the fair market value reported on the final return, plus disposition costs. A qualified trust designation may change this, so confirm with an accountant.

For a death from January 1 to October 31, the final return is due by April 30 of the following year. A T3 return is due no later than 90 days after the trust's tax year-end, and the balance owing is also due then.

What to do next

• Find the reverse mortgage contract and the lender's contact details.
• Notify the lender of the death and ask in writing about its timing policy.
• Request a payout statement and a current appraisal of the home.
• Identify the estate trustee and speak to a lawyer about probate and authority.
• Keep insurance and property taxes up to date while the estate is sorted out.
• Speak to an accountant about the final return and any tax on a sale.

Frequently asked questions