“It could be a beneficial tool for certain people, but not for others,” says Barbara Knoblach, an Edmonton-based financial planner at Money Coaches Canada.
How reverse mortgages work
Reverse mortgages are available to Canadian homeowners who are 55 and older. Up to 55% of the equity built up in the home can be unlocked tax-free in a lump sum or incremental payments, usually at interest rates 2% to 3% higher than what a conventional mortgage would carry.
Unlike a traditional mortgage, the loan and interest is not paid back in regular intervals. Instead, that happens when the homeowner moves, sells, or dies. In the case of death, the loan and interest repayment becomes the responsibility of the homeowner’s estate.
The homeowner retains the title and cannot be forced out of the property. In Canada, there are also consumer protections against the borrower having to pay back more than what the home is worth.
The costs and trade-offs
Homeowners have some responsibilities during the life of the loan. The properties must not be allowed to fall into a state of disrepair that would decrease the value. They also remain on the hook for property taxes and homeowners insurance.
There are other costs to be aware of, including legal, appraisal, and closing fees. There might also be prepayment penalties if you pay before the term is up.
One of the knocks against reverse mortgages is that with years of interest piling up at high rates, there’s seldom much equity, if any, left by the time the homeowner passes on. “The client for whom this could be a fit would be the person who doesn’t care so much about estate preservation. They may not have any children or other people that they want to leave an estate to, says Knoblach. “They would say, ‘This is my house. I’ve worked toward it and I want to stay here. And, if at the end of my life, all the equity is gone, I do not really care. I’ve had my retirement where I wanted to live.’”
When a reverse mortgage makes sense
For some cash-strapped homeowners wanting to leverage their home equity, there may be better options, says Knoblach. Downsizing to a smaller property is one. And for someone still earning an income, home equity lines of credit usually have more flexibility and better rates. “They should work with a financial planner or with somebody knowledgeable before they make a decision to get into this type of product that they cannot extract themselves out of,” she says.
Knoblach also cautions against using funds from a reverse mortgage to finance a lifestyle that would otherwise not be sustainable.
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Meanwhile, Anthony Quinn, president of the Canadian Association of Retired Persons, says a reverse mortgage can be life changing. The advocacy group has long endorsed the CHIP Reverse Mortgage offered by HomeEquity Bank.
“We did a lot of due diligence into the product and found that it was a unique answer to the questions that our members had,” says Quinn. “We found it really was not for everyone, but for a segment of Canadians who own their homes either outright or have a small remaining mortgage and want to access the value in that home without doing what would be unthinkable for them, which is moving out of their house.”
Downsizing is often not a viable option, as there’s no guarantee a lower-cost property is available where someone has spent decades building social ties and a support system, Quinn says.
More than an inheritance
As for the estate considerations, Quinn says it’s up to homeowners to decide what they want to accomplish. “In actual fact, what we hear is oftentimes they are taking money out to help their adult children in the now rather than in the future through their will,” he says. “And they’re taking money for children and grandchildren for their education..”
Quinn rankles at the “paternalism” and “ageism” that he often hears creep into the discussion over reverse mortgages—views along the lines of “we don’t want mom or dad or grandma or grandpa having access to their money because they might do something frivolous with it.”
Tapping their home equity could allow homeowners to make accessibility improvements to their homes that would enable them to stay longer, purchase or maintain a vehicle, or just be more choosy at the grocery store, Quinn says. “Older Canadians have done the right thing,” he says. “They were told that they should invest in their home.”
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