Reverse Mortgage vs Selling Your Home in Ontario: Which Fits?

If you are a senior with a lot of your wealth tied up in your house, two options often come up: borrow against it with a reverse mortgage and stay put, or sell and move somewhere smaller or easier to manage. Both turn home equity into money you can use. They do it in very different ways.

This article compares the two on the points that matter most: how much cash you can reach, what it costs, who owns the home afterward, and what legal consequences follow. It explains how things generally work in Ontario. Your own numbers and family situation will change the answer, so use this as a guide for the questions to ask.

The two options side by side

A reverse mortgage is a loan for homeowners, usually 55 or older. You borrow against your equity and keep living in and owning the home. Selling ends your ownership and gives you the sale proceeds, after the costs of selling and any debts on the property are dealt with.

Equity and borrowing limits

A reverse mortgage usually lets you borrow up to 55% of the home's current value. The exact amount depends on the ages of all borrowers on title, the home's condition, type and appraised value, and the lender. If you still have a mortgage, the usual maximum is 55% less the mortgage balance.

That means a reverse mortgage unlocks only part of your equity, while a sale releases the whole value of the home (minus what you owe and the costs of selling). If you need a large sum, for example to buy a smaller home, this gap can decide the question.

The money you receive from a reverse mortgage is tax-free and does not reduce OAS or GIS benefits. Whether sale proceeds affect taxes or benefits depends on your situation, including whether the home was your principal residence, so confirm that with an accountant.

What each option costs

Reverse mortgage interest rates are usually higher than rates on a regular mortgage or HELOC, and the interest is added to the balance. Possible costs include appraisal, set-up, legal and closing fees, plus prepayment penalties. Fees vary by lender and may be added to the balance or paid upfront.

Payout choices also affect cost. A lump sum means interest runs on the full amount. A partial lump sum with later draws usually requires about $25,000 upfront, and extra draws may carry a fee or change the rate on the whole balance. Regular payments are typically $1,000 monthly or $3,000 every three months, usually after an initial amount of about $20,000.

Selling has its own costs, such as real estate and legal fees, and moving expenses. These vary a great deal, so get written estimates before you compare. Remember to include the cost of the next place you will live.

Ownership, family and legal consequences

• Repayment trigger: a reverse mortgage must be repaid when the home is sold, you move out, the last borrower dies, or you default. You can repay in full at any time, though early repayment may carry a fee.
• Your estate: when the borrower dies, the estate may have to repay the loan plus interest within a set period. That period may be shorter than the time needed to settle the estate, and each lender sets its own timing and late-repayment consequences.
• Existing debts: a mortgage or HELOC already on the home may have to be paid off and closed, and the reverse mortgage proceeds may be used for this.
• Primary residence: the home is usually your primary residence, meaning you live there at least 6 months a year.
• Spouses: if the home is a matrimonial home, a spouse generally cannot encumber it unless a statutory exception applies, such as the other spouse joining in or consenting.

If you ever fall behind on a loan secured on the home, the lender may enforce its security. Where a mortgage contains a power of sale, the lender may sell once the borrower has been in default for at least 15 days and at least 35 days' notice has been given to everyone with an interest in the property. Sale proceeds go first to the lender's principal and interest, the expenses of the sale, and other encumbrances in order of priority, and any remaining surplus goes to the borrower.

Questions to ask before you choose

• Do I want to stay in this home, and for how long?
• Will 55% of the home's value, or less, cover what I actually need?
• How much do I want my children or other heirs to inherit, given that the balance grows?
• Could I manage the home's upkeep and costs in the years ahead?
• What would a smaller home cost, and what would moving cost?

What to do next

Some provinces require independent legal advice for a reverse mortgage. Where it is not required, the Financial Consumer Agency of Canada still suggests getting legal advice. A real estate lawyer can explain the loan terms and how title, spouses and your will fit together.

• Write down what you need the money for and how much.
• Ask at least two lenders for written terms, fees and rates.
• Ask a realtor or lawyer for a rough net-proceeds estimate if you sold.
• Talk to family about your plans before deciding.
• Speak with a lawyer, and an accountant about taxes, before signing anything.

Frequently asked questions