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CANADIAN CENTRE FOR ELDER LAW 1822 East Mall, University of British Columbia Vancouver, British Columbia V6T 1Z1 Voice: (604) 822 0633 Fax: (604) 822 0144 E‐mail: [email protected] Website: www.ccels.ca ADIVISION OF THE BRITISH COLUMBIA LAW INSTITUTE Backgrounder CCEL Report no. 2/ BCLI Report no. 41—Report on Reverse Mortgages Date: February 2006 A reverse mortgage is a type of loan secured by a mortgage of real estate. Reverse mort‐ gages differ from conventional mortgages in a number of ways, most importantly with re‐ gard to repayment and eligibility. Many older adults own major assets such as real estate and are unencumbered by a mort‐ gage. Upon retirement they often experience diminished incomes. Lenders have developed reverse mortgages to cater to these seniors. In British Columbia, as in most other jurisdic‐ tions, only senior citizens are eligible to borrow under a reverse mortgage. Unlike conventional mortgages, reverse mortgages do not require a borrower to make pe‐ riodic repayments of principal and interest. Rather, the loan is repaid after the borrower’s death or when the borrower’s principal residence is sold or abandoned. Though there is no requirement to repay the growing interest periodically, the interest is added to the princi‐ pal loan balance and compounded over the term of the loan. This can make reverse mort‐ gages a very expensive way of borrowing. The one time repayment upon sale of the home or death of the homeowner may represent a substantial amount of a borrower’s equity in the mortgaged property. Often borrowers invest the proceeds in a type of investment that provides income payments at regular intervals called an annuity, or other asset that pro‐ vides them with a regular income. British Columbia does not have a statute the specifically addresses reverse mortgages. The existing law requiring lenders to disclose information to borrowers before a loan transac‐ tion closes do not apply to most reverse mortgages. This does not provide an adequate le‐ gal framework for reverse mortgages. This report recommends enacting legislation that will specifically address reverse mortgages. The proposed legislation is focused on disclo‐ sure and related consumer protection measures. It will ensure that reverse mortgage bor‐ rowers have the tools necessary to evaluate the legal and financial merits of the transac‐ tion.

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Page 1: A DIVISION OF THE BRITISH COLUMBIA AW NSTITUTE · 2011-03-01 · tions, only senior citizens are eligible to borrow under a reverse mortgage. Unlike conventional mortgages, reverse

CANADIANCENTREFORELDERLAW 1822EastMall,UniversityofBritishColumbia Vancouver,BritishColumbiaV6T1Z1 Voice:(604)8220633Fax:(604)8220144E‐mail:[email protected] Website:www.ccels.ca

ADIVISIONOFTHEBRITISHCOLUMBIALAWINSTITUTE

Backgrounder

CCELReportno.2/BCLIReportno.41—ReportonReverseMortgagesDate:February2006

Areversemortgage isa typeof loansecuredbyamortgageofrealestate.Reversemort‐gagesdifferfromconventionalmortgagesinanumberofways,mostimportantlywithre‐gardtorepaymentandeligibility.Manyolderadultsownmajorassetssuchasrealestateandareunencumberedbyamort‐gage.Uponretirementtheyoftenexperiencediminishedincomes.Lendershavedevelopedreversemortgagestocatertotheseseniors.InBritishColumbia,asinmostotherjurisdic‐tions,onlyseniorcitizensareeligibletoborrowunderareversemortgage.Unlikeconventionalmortgages,reversemortgagesdonotrequireaborrowertomakepe‐riodicrepaymentsofprincipalandinterest.Rather,theloanisrepaidaftertheborrower’sdeathorwhentheborrower’sprincipalresidenceissoldorabandoned.Thoughthereisnorequirementtorepaythegrowinginterestperiodically,theinterestisaddedtotheprinci‐palloanbalanceandcompoundedoverthetermoftheloan.Thiscanmakereversemort‐gagesaveryexpensivewayofborrowing.Theonetimerepaymentuponsaleofthehomeordeathofthehomeownermayrepresentasubstantialamountofaborrower’sequityinthemortgagedproperty.Oftenborrowersinvesttheproceedsinatypeofinvestmentthatprovides incomepaymentsatregular intervalscalledanannuity,orotherasset thatpro‐videsthemwitharegularincome.BritishColumbiadoesnothaveastatutethespecificallyaddressesreversemortgages.Theexistinglawrequiringlenderstodiscloseinformationtoborrowersbeforealoantransac‐tionclosesdonotapplytomostreversemortgages.Thisdoesnotprovideanadequatele‐gal framework for reversemortgages. This report recommends enacting legislation thatwillspecificallyaddressreversemortgages.Theproposedlegislationisfocusedondisclo‐sureandrelatedconsumerprotectionmeasures.Itwillensurethatreversemortgagebor‐rowershave the toolsnecessary toevaluate the legaland financialmeritsof the transac‐tion.

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