Fixed versus variable reverse mortgage rates

This article was produced in partnership with HomeEquity Bank

In the current inflationary landscape, your clients 55+ may be interested in exploring reverse mortgage options to ease financial pressure while remaining in the home they love. In addition, those who have already leveraged a reverse mortgage may be eager to review their mortgage rate options in the face of rising interest rates.

So, which is the better reverse mortgage rate option: fixed or variable? Unfortunately, there isn’t always a straightforward answer to that question – but a discussion with clients about their options, current situation, and financial goals can help steer them in the right direction.

How rising interest rates affect homeowners

On December 7, the Bank of Canada (BoC) raised its key interest rate by 50 basis points as it continues to wrangle high inflation. This marked the seventh increase since March and brought the rate to 4.25%.

A good place to start the fixed versus variable conversation is to sit with clients and take inventory of their current situation. You should consider the following: do they currently have a fixed rate or variable rate mortgage? For both those exploring reverse mortgages and those who currently hold one, what is their current economic state? Answers to these questions will help determine which options are available to the client and whether or not their current situation is still serving them. It also helps guide the conversation as you work to ensure they’re making the best decisions for their circumstances.

Back to basics

It can be helpful to get back to the basics and educate clients on a reverse mortgage and how the rate options fit into the reverse mortgage picture. A reverse mortgage is a loan secured by the value of a house, providing Canadian homeowners age 55+ access to tax-free cash of up to 55% of the appraised value of their home[i]. Accessing equity, they have in their home can help Canadian homeowners 55+ supplement their retirement income, without having to sell the home they worked so hard to buy ­– giving your clients who fit the requirements a solid financial option, and one that is becoming increasingly popular as the cost-of-living and real estate prices continue to rise. 

No regular monthly mortgage payments are required[ii], which is a great benefit to clients with limited or fixed income in retirement, but it does mean reverse mortgage rates can be higher than those of a conventional mortgage. Like conventional mortgages, reverse mortgages have fixed and variable rates that are impacted by the BoC rates – but an important distinction is that the concept of affording higher rates has to do with the impact of rising rates on the overall amount of the reverse mortgage loan rather than the cashflow required to meet monthly payments.

The fixed versus variable debate

Reverse mortgage clients have the freedom to choose either a fixed rate or a variable rate, depending on what best suits their situation[iii]. Fixed rate mortgages provide cost stability for the duration of the term, whereas variable rates depend on the state of the economy and corresponding actions by the BoC and HomeEquity Bank.

Fixed rates can be the safest choice when the economic forecast is one of ongoing inflation, volatility, and correspondingly rising rates. However, if a borrower locks into a fixed term rate agreement and this is followed by economic recovery and interest rates decrease, they could be subject to a higher interest rate for a prolonged period, while interest rates may continue to lower.

If a client already holds a variable rate reverse mortgage, the current climate might encourage them to change. If they do opt to switch to a fixed rate, penalties may be incurred. Contracts should be reviewed, and it’s worth discussing with clients to determine if it’s in their best interest to switch from a variable rate to one of our fixed rate terms.

Clients may also choose to switch from their current fixed rate interest term to another fixed rate interest term. There may also be fees associated with this type of switch.

To break a fixed rate mortgage midway through the term, the borrower will typically incur an interest rate differential (IRD) charge. However, if a client has an upcoming interest reset date, they may switch at no cost during a specified window.  

If you have clients who are Canadian homeowners 55+, talk to them about the advantages of a reverse mortgage, and for those already holding a reverse mortgage, now is the time to educate them on their interest rate options. To find out more, visit chipadvisor.ca/bdm/ to speak with a HomeEquity Bank Business Development Manager.