Reverse Mortgages - The Most Misunderstood Mortgage Product - Forget What You Think You Know
If you are retired or have aging parents, you need to read this newsletter. Before I became a Broker, I flinched at the term "reverse mortgage". Like so many Canadians, much of what I knew about them came from US news and advertisements. These products in the US are completely different than here. In Canada, reverse mortgages are governed far more tightly. In fact, only two banks offer them in Canada and the industry leader has been selling them for over 30 years.
The more I have learned about reverse mortgages, the more I see them as a key tool for some seniors and their families. Let's break down some of the most commonly held misconceptions. In my January newsletter I will break out how these mortgages can be used to help mature Canadians stay in their home longer, maintain financial independence, and meet other personal goals.
What Is A Reverse Mortgage?
A reverse mortgage is a way for Canadian howeowners 55 or older to access up to 55% of the value of their home without the standard credit or income qualifying requirements. The amount of equity you can pull out is dependent on your age, property type, and property location. It is a loan secured against the value of the home, but unlike a traditional home equity line of credit or conventional mortgage, there are no monthly mortgage payments for as long as you live in your home. The interest owing is added to the loan amount and paid out when you sell or move out.
Reverse Mortgage Myths
MYTH #1 - I will lose ownership of my home.
Just like any other mortgage, the home is used to secure the loan. The mortgage lender is registered as a standard charge on the title in first position. The homeowner maintains title ownership and control of their home.
MYTH #2 - I will owe more money than the house is worth.
99% of clients have equity remaining in the home after the loan is repaid. In the rare event that the home depreciates in value and the loan amount due is more than the sale amount of the property, the lender would cover the difference between the sale price and the loan amount. It is a non-recourse loan. You would never be forced to sell if the amount owing exceeded the value or asked to pay the difference.
MYTH #3 - The bank can force me to sell or can foreclose at any time.
A reverse mortgage is a lifetime product, and as long as the property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is still living in the home, the loan will not be called even if the house decreases in value.
MYTH #4 - Surviving spouses are stuck paying the loan after the homeowner passes away.
If a homeowner passes away, as long as their surviving spouse is on title to the property, they can choose to remain in the home without having to make a repayment. The loan is due when both applicants move out or the property is sold.
MYTH #5 - I can't get a reverse mortgage if I already have an existing mortgage.
A reverse mortgage can be used for a purchase, for debt consolidation, to pull equity out in a lump sum or in the form of a tax-free monthly income, or to restructure a current mortgage to eliminate monthly payments.
MYTH #6 - Reverse Mortgages are very expensive with high rates so they should only be used as a last resort.
The rates offered are generally more favourable than alternative lenders' rates, as well as those on second mortgages or unsecured loans. They are generally priced slightly higher than a HELOC (Home Equity Line of Credit). But they also have the added benefit of no required monthly payment. This can be a key feature for those trying to live on a fixed pension income or stretch out retirement savings, and well worth the slightly higher rate.
Contact me if you have more questions or would like to explore whether a reverse mortgage may be a fit for you or a loved one.