Negative Equity | What you Should Know

The reality is, most Canadians have a significant amount of equity built up in their homes and this equity can be used to help plan through retirement.

Dealing with a negative equity position is very uncommon, one of the only times the idea of negative equity even comes up is when discussing a reverse mortgage. Usually, the question is asked something like this:

“If my home has depreciated in value at the time it is sold, and the mortgage balance is growing, will I (or my heirs) end up owing more than the house is worth?”

And in the case of a reverse mortgage through the Home Equity Bank, the answer is no. No, assuming you meet all your mortgage obligations, the amount you will pay on your due date will never exceed the fair market value of your home. This is what they call their No Negative Equity Guarantee.

As a reverse mortgage doesn’t have any payments required throughout the life of the mortgage, naturally, the outstanding balance grows with time. But as the Home Equity Bank has more restrictive initial qualifying guidelines than a standard mortgage, even though the balance is growing, it rarely grows beyond the value of the home. And if it does, Home Equity Bank covers the difference.

Compare that with a standard mortgage, where if you wanted to access your home equity, you can potentially refinance up to 80% of the property value, or in the case you're downsizing, you can buy a new property with as little as 5% down. In this case, when the question is asked “is it possible to end up owing more than my property is worth” with a standard mortgage, the answer is yes. If the market takes a turn, you could find yourself in a negative equity position.

Understanding your mortgage options through retirement is crucial to making the best choice for you. Each person’s financial situation is different and there is no one size fits all advice that can be provided on a blog.

As a Lifestyle Mortgage expert, I specialize in helping older Canadians to understand their options, and provide counsel to help them make the best choice. If you have any questions at all, and would like to discuss your financial situation with me, please contact me directly anytime.