6 min read

Fraction Mortgage vs. reverse mortgage

Let’s compare the reverse mortgage against the Fraction Mortgage — two home equity products that allow Canadian homeowners to tap home equity with no required monthly payments.

Fraction
August 2, 2022
Blog overview

Reverse mortgage overview

Fraction Mortgage overview

Critical differences

  • Receiving funds
  • Interest rates
  • Payment schedule
  • Age requirements
  • Credit score and income
  • Qualifying properties
  • Risk protection
  • Early repayment

Which is cheaper?

Which is faster?

Which is right for you?

Whether you’re looking to supplement your retirement income, planning to make a large purchase, or financing home improvements, tapping your home equity may be the next logical step in your financial journey.

Thankfully, there are more options available to tap into your home equity. These include traditional options, such as home equity loans, cash-out refinancing, reverse mortgages, and home equity lines of credit (HELOCs).

Even new innovations are helping homeowners unlock their equity. The Fraction Mortgage, for example, delivers similar benefits to reverse mortgages but without the same restrictions to qualify.

On that note, let’s compare the reverse mortgage against the Fraction Mortgage — two home equity products that allow Canadian homeowners to tap home equity with no monthly payments.

Reverse Mortgage

A reverse mortgage, as the name suggests, is a mortgage that pays you rather than you paying it. Sounds too good to be true? Well, you might want to keep reading. 

Since reverse mortgages are loans secured against your property, an interest rate will accrue throughout the loan’s lifetime, increasing the balance due. When your reverse mortgage term ends, you will likely be required to sell your home to settle the balance.

Qualifying for a reverse mortgage is far more nuanced than traditional financing options such as home equity loans and HELOCs. For instance, you and your spouse must be 55 or older, the home must be your primary residence, and you must own the home outright (or a considerable portion). Some reverse mortgage providers offer alternative lending to borrowers under 55, although these loans generally come with a reduced LTV and fewer protections.

When determining whether or not to approve your reverse mortgage, mortgage providers will consider the age of the individuals on the title, along with the location, condition, type, and appraised value of your home. 

If you do qualify for the reverse mortgage, you must not vacate the home for more than 6 months or risk having your balance made due. If this occurs, a reverse mortgage provider would consider you in default, and request repayment by selling your home or other resources.

If you fail to pay property taxes, home insurance or do not keep up with general upkeep of the property, the reverse mortgage provider has it in their rights to have the loan made due. Reverse mortgages are also known for having high closing costs, and the application process can be pretty grueling compared to other financing options.

All that being said, with stricter qualifications and terms comes some favorable protections for you as the homeowner. For example, if your home depreciates to the point that it is no longer profitable for the mortgage company, they cannot foreclose your home or force you to leave.

When considering a reverse mortgage, make sure to do your due diligence. As a product targeted at aging and potentially vulnerable homeowners, the industry has attracted several scams to trick you out of your home. If the offer sounds too good to be true, it probably is.

Depending on your situation, a reverse mortgage may be the right choice for you. Granted, in a time when we see a lot of innovation in the home equity space, it is not your only option.

Fraction Mortgage

The Fraction Mortgage is an increasingly common way for homeowners to borrow against their home equity without any monthly payments. Fraction was recently named Mortgage Lender of the Year by the Canadian Lenders Association.

Unlike a reverse mortgage, there is no minimum age requirement to qualify, and you aren’t restricted to your primary residence. You can take out a Fraction Mortgage on your primary, secondary, and investment property. Fraction Mortgage users also enjoy a more streamlined application and qualification process.

Another unique aspect of the Fraction Mortgage is the interest rate tied to your home's appreciation. If your home grows in value at a rate above Fraction’s minimum and below the maximum, then the interest rate on your loan will match appreciation. Click here for Fraction’s latest rates.

Many homeowners prefer appreciation-based rates because they make it possible to sustain their portion of home equity. For example, if you borrow 30% of your home equity, you would owe 30% by the end of the term. In this case, a considerable portion of your home equity would still be yours to leverage as you see fit.

Similar to a reverse mortgage, a Fraction Mortgage has no monthly payments. Instead, your balance (principal + interest) becomes due at the end of a 5 year term, with the option to renew your loan for another 5 years.

With the Fraction Mortgage now on the market, more Canadians have the freedom to tap their home equity without adding any monthly expenses. Fraction Mortgages have helped homeowners reduce their debt to income ratio (the amount spent monthly paying back debt) by up to 50% simply by removing monthly payments.

Critical differences between reverse mortgages and Fraction Mortgages

Reverse mortgages and Fraction Mortgages allow homeowners to turn their hard-earned home equity into cash with no monthly payments. Where they differ most is in their loan terms, age requirements, and qualifying properties. 

For more details, here is a more comprehensive comparison of reverse mortgages and Fraction Mortgages.

Receiving your funds

  • Reverse mortgage: Option to receive funds in monthly payments, or as a lump sum.
  • Fraction Mortgage: Funds are received as a lump-sum payment at the beginning of the term.

Interest rates

  • Reverse mortgage: Fixed or variable rates are available. Variable-rate mortgages are tied to the prime rate.
  • Fraction Mortgage: Variable rates that match the appreciation of your home. No matter the situation, every homeowner qualifies for Fraction’s lowest rate. For the latest Fraction Mortgage rates, click here.

Payment schedule

  • Reverse mortgage: No monthly payments are required. However, if you leave your home for more than 6 months (even for medical reasons), fail to pay property taxes or insurance, or your home is not maintained correctly, your loan becomes due.
  • Fraction Mortgage: No monthly payments. The loan becomes due if you fail to pay property taxes or insurance. Otherwise, the loan is due at the end of the 5 year term with the opportunity to refinance. Note that refinancing is subject to appraisal and a 1% refinancing fee.*

Age Requirements

  • Reverse mortgage: Must be 55 years or older.
  • Fraction Mortgage: No age restrictions.

Credit Score & Income

  • Reverse mortgage: No income or credit score requirements. Must prove that you can cover property taxes, insurance, and other ownership expenses. 
  • Fraction Mortgage: Minimal income requirements. A fair credit score is required (approx. 640). Must prove that you can cover property taxes, insurance, and other ownership expenses. 

Qualifying properties

  • Reverse mortgage: Primary residence only. Must remain in the home.
  • Fraction Mortgage: Primary, secondary, and investment properties accepted. You are not required to stay in the home.

Risk protection

  • Reverse mortgage: The amount owed will never be more than your home is worth, even if the balance exceeds the home value.
  • Fraction Mortgage: Appreciation-based interest rates helps to protect equity if home appreciation decelerates.

Early repayment

  • Reverse mortgage: Early repayment incurs a penalty.
  • Fraction Mortgage: No exit penalties.

What is cheaper — reverse mortgage or Fraction Mortgage?

It depends. Reverse mortgages and Fraction Mortgages have comparable origination fees and closing costs, including the cost of an appraisal. However, reverse mortgage lenders do charge a penalty if the loan is paid back too early.

Which gets you funds faster — reverse mortgage or Fraction Mortgage?

It depends. Reverse mortgages and Fraction Mortgages require a home appraisal, underwriting, and conveyancing to process fully. The time needed to complete these steps can vary on a case-by-case basis.

With a streamlined application, Fraction Mortgages may get the edge as a digital-first lender. From application to funds received, Fraction has been able to process files in as little as 3 to 4 weeks.

Which is right for you — reverse mortgage or Fraction Mortgage?

Reverse mortgages and Fraction Mortgages both have their advantages and disadvantages.

As a general rule of thumb, a reverse mortgage is preferred for homeowners who want a guaranteed interest rate regardless of the high cost or equity depletion and are comfortable with giving up their home once they move out or pass on.

A Fraction Mortgage, on the other hand, is a more flexible option for homeowners who want more money upfront — especially younger borrowers. With more open qualifications, no age restrictions, shorter terms, and no exit penalties, a Fraction Mortgage gives you the flexibility to leverage your equity without monthly payments — all without locking you into a long-term commitment.