6 min read

Fraction Mortgage vs. reverse mortgage

Both products allow Canadian homeowners to tap home equity with no monthly payments. So what's the difference between Fraction and a reverse mortgage?

Fraction

August 2, 2022

Blog overview

Reverse mortgage overview

Fraction Mortgage overview

Critical differences

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.

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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.

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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,. You can take out a Fraction Mortgage on your primary residence. Fraction Mortgage users also enjoy a more streamlined application and qualification process.

Click here for Fraction’s latest rates.

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 potential 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.

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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.

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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.

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Interest rates

Reverse mortgage: Fixed or variable rates are available. Variable-rate mortgages are tied to the prime rate.
Fraction Mortgage: Fraction currently only offers fixed rates. For the latest Fraction Mortgage rates, click here.

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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.*

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Age Requirements

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

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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.

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Qualifying properties

Reverse mortgage: Primary residence only. Must remain in the home.
Fraction Mortgage: Primary residence only. Must remain 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: The amount owed will never be more than your home is worth, even if the balance exceeds the home value.

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Early repayment

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

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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.

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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.

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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.

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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.

Fraction HELOC is available in WA with more states to come.

Equal Housing Opportunity

This site is not authorized by the New York State Department of Financial Services. No mortgage solicitation activity or loan applications for properties located in the State of New York can be facilitated through the Fraction site.

*Important Disclosures:

The interest rate for the Fraction Mortgage is calculated based on an Index, which is the Zillow Home Value Index (ZHVI), which is published at https://www.zillow.com/research/data/ on the third Thursday of each month. The interest rate at a given date during the term will be calculated as the change in the ZHVI from the initial date of origination up to that given date during the term. The minimum APR for a 5 year Fraction Mortgage is 9.37% and the maximum APR is 16.02%.
The Fraction Mortgage is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will match the interest rate of the existing principal.
Fraction charges an origination fee of up to 2.5%. If working with a broker, the origination fee for Fraction is 1.5% and you may also pay a broker fee up to 1.5%. You may also be responsible for paying recording fees, which vary by county, as well as inspection and appraisal fees, which vary by property.
Our loan amounts range from a minimum of $50,000 to a maximum of $1,500,000. Your maximum loan amount may be lower than $1,500,000 and will ultimately depend on your home value at the time of application. We determine your home value through independent data sources, automated valuation models, and third-party appraisals.
To check whether you might qualify for a Fraction Mortgage, we will conduct a soft credit pull that will not affect your credit score. However, if you continue and submit an application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
The Fraction Mortgage is a lending product with a fixed-term and secured against a property. Interest accrues over the term of the loan, with no monthly payments owed over the loan term. The Fraction Mortgage is available to homeowners over 18 years old. Fraction will accept applicants with a minimum FICO credit score of 640. An inspection may be required if your loan balance exceeds $1,000,000 and will cost approximately $750. Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone. Other taxes and government fees may be charged by your county and/or state. All fees other than the origination fee are paid to third parties and will be based on the actual cost of the services. The minimum and maximum term is 5 years.
Repayment is due at the end of the term and can be paid at any time up to and including the end of the loan term. Renewal options are available pending a new credit check and sufficient equity in the property.