The pros and cons of a Reverse Mortgage
Guest post from Tricia French, MSc, PHEc
A Reverse Mortgage is a means for homeowners to access a portion of the stored value of their home to use today, while still retaining ownership of their home. In effect, converting the equity to cash, which can be received as a lump sum, regular payments, or a combination of the two. The agreement is a “life-term” loan, which is a loan for either the lifetime(s) of the owners or the life of the ownership of the home.
Reverse mortgages are marketed very effectively. The portrayal seems undeniably convincing. Stay in your home. Remain independent. Maintain your financial freedom. Enjoy your money now, you deserve it. Renovate your house. Give your family money. Your home will continue to appreciate in value and offset interest costs and loss of equity.
Advantages:
- Payments from a reverse mortgage are tax-free income, so income-tested benefits such as OAS and GIS will not be affected.
- Reverse mortgages do not have to be repaid until you sell your home or you or your surviving partner pass away.
- The freedom to eliminate monthly payments can be a benefit for stretched budgets.
- You can repay the loan at any time.
- If the investment market takes a downturn, a reverse mortgage could fill the gap until your investments stabilize or reach maturity.
- The amount you owe can never exceed the value of your property.
- You and your beneficiaries will not be responsible for any shortfall if interest rates increase and housing values drop.
- Depending on the provider, funds can be received as a lump sum, regular payments or a combination of lump sum and regular payments.
- Interest paid on the reverse mortgage is tax deductible if the proceeds were used to earn investment income (interest or dividends).
Disadvantages:
- While your home may continue to appreciate in value and offset some of the interest costs and loss of equity, interest will rapidly accumulate on the amount you borrow.
- Providers market the benefit of using a reverse mortgage to increase savings by shifting wealth from your home to your investments. This form of leverage adds risk.
- Due to start-up fees and higher rates of interest, reverse mortgages are more costly than conventional lines of credit or mortgages. Early payment of all or a portion of the amount borrowed could subject you to prepayment penalties. Borrowing against your home will impact the amount available to pass on to your beneficiaries.
- There are limited options as only two companies in Canada offer reverse mortgages: Canadian Home Income Plan (CHIP) and Seniors Money Canada.
- Reverse Mortgages can be an expensive way to access some of the value built up in your home. Start-up fees can be significant and interest rates on reverse mortgages are much higher than standard mortgage rates. Start-up fees depend on options selected but typically include an application fee, home appraisal fee, and costs for independent legal advice. Fees can easily reach $2000 to $2500 which is deducted from the principle received.
- The amount you can borrow through a reverse mortgage varies dramatically based on geographic location, the type of housing you own, your age and gender, and the amount of your current debt. A reverse mortgage may not be an option depending on these circumstances.
Reverse Mortgage Lines of Credit
Reverse Mortgage Lines of Credit are available at some Credit Unions in British Columbia and Ontario. A reverse mortgage line of credit functions like a reverse mortgage in that no payments are required until you sell your house, or you and your surviving spouse pass away. You may make payments of interest or interest and principal if you wish. The limit on the line of credit is based on similar criteria to the reverse mortgage: property value, geographic location, type of housing, and amount of current debt.
Providers:
Only two companies in Canada offer reverse mortgages: Canadian Home Income Plan (CHIP) and Seniors Money Canada. The Canadian Home Income Plan (CHIP) is a private corporation that has offered reverse mortgages since 1986, and is the leading provider. Seniors Money Canada, a division of Seniors Money International, was introduced to the Canadian Market from New Zealand in August 2007, and expanded offerings to include Western and Atlantic Canada in January 2008. Due to world economic conditions, Seniors Money has ceased accepting new loans. Many mortgage brokers or Accredited Mortgage Professionals (AMP) will provide information and advice regarding reverse mortgage products. Reverse mortgage providers partner with banks, credit unions, mortgage brokers, financial and investment advisors, and other financial professionals who are then compensated for providing client referrals.
As opposed to a standard mortgage, reverse mortgages are a growing debt that consumes the equity in your home. Though the balance, principle borrowed plus accumulated interest, does not need to be repaid until you sell or pass away, it is quietly mounting and can reach a level that your remaining equity is too depleted to allow you consider alternative types of housing, i.e., downsizing. You can run down your equity far faster than you built it. Both providers in Canada expect you to seek and pay for independent legal advice, to ensure you are entering into the agreement freely, that is, without pressure, and that you understand the contract and any potential risks.
Borrowing minimums and maximums vary between providers and are generally based on a percentage of the value of your home. However, the amount you can borrow through a reverse mortgage varies dramatically based on geographic location, the type of housing you own, your age and gender, and the amount of your current debt.
These products are complex and all costs, advantages, and disadvantages should be carefully contemplated within the context of your overall financial plan.
Patricia French is a Financial Counsellor and Professional Human Ecologist specializing in planning with clients under the age of 50. She is an experienced facilitator, pre-retirement educator, and University instructor with the Department of Human Ecology at the University of Alberta teaching in the area of family finance. She is driven to provide clients, participants, and students with key knowledge, skills, and strategies to navigate the often potholed financial road ahead.
Comments
I am absolutely NOT a fan of reverse mortgages; they’re an expensive way to tap your equity. Why not rent out a portion of your home? Borrow against your home? I would advise going to great lengths to avoid a reverse mortgage.
And what equity would the renter receive?
Or is the rent to be set only at a portion of maintenance, administration, etc…
and not any extra borrowed from the renter?
Or would the rent include some extra borrowed amount and at what rate? 4% ??
Or is the intention in the rent suggestion to rob the renter completely charging whatever one can ‘get away with’, eg: ‘market value’. ??
Renting is not robbing. If I owned a tool and you rented it for two days that is what you get. If I rent you a room or a suite for 2 years that is what you get.
Totally agree, am NOT a fan of reverse mortgage. Seems like an expensive way of selling your home! I wrote to a CHIP advertiser, twice, I never got a reply, let alone an acknowledgement. Stay away.
Reverse mortgages can be beneficial when used correctly but what amazes is the fact that there are only a few providers in the industry when compared to the conventional mortgage. I guess at the end of the day its because there isn’t a market for “reverse” mortgage backed securities. Getting controlled by hedge funds, pretty sad if you ask me!
There’s actually only one company currently offering reverse mortgages – CHIP. The others say due to economic times they are not offering RMs at this time.
Jim, you are absolutely right. We have been getting a few inquiries from clients out in Ontario and the only lender we are able to use is CHIP.
With prime still at 3% and the economy not recovering, I am getting our clients to go towards the HELOC route due to lower fees (only legal fees for re-registering the mortgage), better interest rate, convenience (online banking to check balances) and because HELOCs are open less a $250 discharge fee, it just make sense to go that route as opposed to the reverse mortgage.
Sorry Jim, don’t mean to double post but I forgot to add why we came to this conclusion. We were looking at a few pros/cons.
With the HELOC:
Positives – you are able to use up 80% ltv at a lower rate for now (prime + 0.5), no lender fees besides the legal fees and the appraisal. Draw funds at any time up to 80%
Negatives – Still have to qualify for a mortgage, beacon score has to be over 650 for HELOCs, still have use income to qualify (pension income is totally fine), obligated to make monthly payments
With the CHIP plan:
Positives – Credit score/income not as stringent, no obligation for monthly but you are expected to pay a minimum of $1,000 yearly, same appraisal and legal fees.
Negatives – Higher rate, lowest we are able to offer is the variable rate at 4.75, highest ltv is at 50%, $1,495 CHIP fee (which can be added to mortgage amounts).
After looking at the pros/cons, we are favoring the HELOC, just wondering what your thoughts are on the subject.
Don’t for get that the widow has to requalify for a HELOC upon death of spouse which is a huge benefit for a reverse mortgage with seniors, no requalification and the risk that goes with a HELOC in that area
what does HELOC stand for? what are the pros and cons compared to CHIP?
HELOC stand for Home Equity Line Of Credit.
Great post! Really good way to see what the props and cons are 🙂
Thanks good to know!
@Al
I agree that a HELOC is the better choice, however, many seniors just don’t qualify based on income. Those that do often don’t need a reverse mortgage.
Garth Turner just did a decent analysis of reverse mortgages and highlighted how they can be predatory traps. There are far better options for most. His post is here: http://www.greaterfool.ca/2015/03/22/the-mortgage-that-eats/
There are four beneficiaries to my mother’s estate. My brother is the executor and living in the house on the acreage. He caused flooding damage to the home. of which was partially covered by insurance. However, he ordered another 40,000 dollars in renovations which he should have know could not have been paid. Now he wants to get a CHIP loan for his portion of the estate and wants us other three beneficiaries give him title to the estate so he can pay for these debts. Is this advisable?(He has been very foolish with money and shows a great lack of transparency to us in anything he does with the estate.)He is not paying rent to the estate while he lives there.
Hi JER: I went through something similar several years ago, but my brother and I have no idea where the money went from Mom’s estate. It was about 100,000 to be divided between 3 siblings,one sibling (married to the executor), had issues with my brother, so she held up the estate for 4 years, refused to give us any information about the estate, and in the end we finally got fed up and my brother and I had to hire a lawyer to get them to release the funds. They only decided to settle when they were threatened with a court date. Our lawyer cost us over 6,000.00 and in the end the two of us received 15,000.00 each. To this date we have no idea what happened to the rest, since my mom had no debt when she passed. Do the math! My sister does not speak to any of us, and from what I hear, is gravely ill. This should have been a time for remaining family to come together and support each other.It pains me to know that I will find out about my sister’s passing through the obituaries, and yes, I have tried to reach out to her, but she has chosen not to respond. I would have liked to be there for her in spite of everything. The only thing you can do is try to have the executor removed,and appoint someone else, or leave it alone, take your chances. In the end you and your siblings will be responsible for payment of his mistakes.I wish you luck in whatever you decide to do, and hope your family stays intact.
Reliable information on the pros and cons of the reverse mortgage, It’s hard to pin point it but that’s the case on so many levels.
I guess it all depends on the client who is. I agree with Al and Michael that the HELOC is probably the best bet but even then the chances aren’t great for qualification
I am not in the position of needing a CHIP or HELOC loan at this time, but glad I read this, as I never knew HELOC existed. I had to take CPP disability and just wanted to know what options are out there, incase I was in a position of needing help down the road. Your comments have been so helpful and given me lots to think about. I think HELOC is the decision that I would go with.
Reverse mortgage is like borrowing money from the mafia. Interest rates are almost three times that of a regular mortgage and there are huge upfront fees (application, appraisal, lawyer). If you borrow 100k in reverse mortgage, with compounded interest added to the principal, that amount doubles to 200k in less than 15 years. And if you are lucky(?) enough to live 30 years after you borrow the money, you will owe 400k. At that point you will have Zero equity in your home (unless you live in Vancouver).
But having said that, many seniors have no other option. if you cannot afford food, medicine or heat and there is no other source of income but your paid-off home – reverse mortgage may be the difference between a miserable existence and a bit of quality in life.
The fact is that many seniors in Canada live on $1,300 a month, so getting HELOC is a pipe dream, they would not qualify nor will they be able to make payments, even if it’s interest only. Selling their home may sound like an option, but you have to live somewhere, and another home may cost the same or more. The folks making $1,300 per month don’t have fancy homes, so selling may not net very much money and rent will eat up the proceeds fairly quickly. The only option left for them is a reverse mortgage.
You want to leave your children nothing, then get a reverse mortgage. Beware, is a big mistake. The compounding interest will eat everything up.
anyone know how the CHIP interest is compounded? is it daily? or is it monthly? or annually? this makes a significant difference even at the very same quoted interest rate.
Semi annually.
I know a senior 78 years old, living alone still has a mortgage, drowning in credit card debt, always late in paying his taxes and relies on Canada Pension, desperate for help with No heirs whatsoever.
The Reverse Mortgage seems to be the only option to finish his life off in a more comfortable manner.
Please note that the word ‘principle’ was used several times in the article; the word ‘principal’ ought to be substituted for ‘principle’; a minor glitch but one that needs to be corrected! ‘Principal’ was used correctly in the article regarding Reverse Lines of Credit! To me, Reverse Mortgages are useful for seniors in dire straits as Ted described!
Do all the heirs of a estate have to agree for a CHIP mortgage to be approved?
My brother in law has talked his hospital bound mother into applying for a CHIP mortgage, he has POWA, to do renovations she will never see. We feel this is just ploy to get more money for his own use. He has a history of NOT paying his creditors. And will skip out leaving his sister to pay the piper. Can we do anything to stop this?
I mean he has POA over her finances.
This is excellent post, very helpful… Thank you for posting!
We have two mortgages and debts on credit cards and other debts. We are seniors living on OAS and government supplements. We own a condo that we recently bought after downsizing. If we go into getting a reverse mortgage do we still have to pay our two mortgages monthly?
You will not be able to take out a reverse mortgage without paying out both mortgages in full.
Retiring and needing more income my investment adviser suggested taking out a mortgage. Now on my third 5 year mortgage the $250, has made an annualized 6%. This is not for the faint of heart (I lost about $75k overnight in 2008!) I still owe the same amount but my home is all mine and has doubled in value. Let’s not forget that the interest I pay is tax deductible against the investment income. Obviously not be the best way for everyone. I firmly believe Reverse Mortgages can be categorized as a scam; they should be banned in there current format. Let’s not forget it is the most vulnerable segment of our society that are drawn to the sales pitch.
Iam glad thai I have read all the comments posted by everyone in this article. I dont have any other deaths other than my mortgage. I use credit cards and pay it off at the end of the month. I was looking to have some extra cash in my hand but I’m better off this way.
Anyone considering a reverse mortgage should look at a HELOC first. They are easier to qualify for than you think, as long as your monthly debt-to-income ratio is less than 70%. You just have to know where to look (example: https://maplemoney.com/heloc-home-equity-line-of-credit/). A HELOC saves you 2+% per year and stretches your equity further because you don’t pay interest on a big lump sum (like you do with some reverse mortgages). Moreover, you don’t even have to make payments for the most part. The HELOC itself can make the payments for you indefinitely.
I’m 70. Own this 2-bedroom condo. Have no heirs to leave anything to. Condo plaster cracking everywhere — walls, ceiling — everywhere! Can’t afford to pay for repairs. Considering a reverse mortgage to pay for repairs. Good idea or not?
I have a HELOC account with my bank and have an interest payment of 100.00 every month which seems to go up every month. I am on seniors benefit and that really cuts into my monthly income. Over half of my income goes to bills like taxes, insurance premiums, utilities etc. If I had a house and car payment I would starve. The amount I borrowed was 23000.00 and pay 102.00 every month and interest rates seem to be on the rise.
It looks like you have a HELOC st about 5.5%/year. This would give you $23,000×0.055= $1265 per year divided by 12= $105 per month (approx) If your rate is a variable rate it will go up when interest rates rise (as you have noticed). You are only paying the interest on your $23,000, and in today’s interest rate climate, your 5.5% is likely based on a secured HELOC rate (ie the bank has a lien/mortgage on your house).
This is the worst possible mortgage that anyone could get. Given the rate in which interest is compounded, 50% of your home’s value is wiped out. This product should be made “illegal” .There are a number of other ways to deal with financial hardships if you are a senior homeowner. I am a 45 years experienced banker who has seen many seniors lose their only asset to reverse mortgages.
I can not qualify for a HELOC as my income is 20k per year. I have no debt but need money to pay for a few Renos and to give me a way to pay for unexpected expense. What is I only take out 50k on a line of credit through chip and pay the interest every month. Would that not solve some of the problems?
Hey! here great discussion on the topic….
http://www.aljurfvillas.com/
Dubai? Really? What’s that got to do with Canada? Also, who would want to move there? I prefer my freedom and staying in my own country.
Was considering a Reverse Mortgage but after reading the cons, I can categorically state in no way would I opt for this course of action. Great way for a senior to lose their home. Thanks for the disclosure.
Can you tell me about the regulations governing the reverse mortgage?
Getting a reverse mortgage is like inviting a couple million termites into your house. It quietly eats away your equity and when you sell, or your family inherits the house – there will be little if anything left. DON’T EVER GET A REVERSE MORTGAGE!
what happens to some one that claims single .on there chip mortgage .they would get more on the chip mortgage for 3 years what happen s to the spouse then if every thing is left to them do they get 90 day to pay off the lone to chip . .chip will help them as well can any one tell me or do you sell and start over
We are recently retired but still with a house with a $300k mortgage left. Now being on a reduced fixed income our current mortgage is eating up 52% of our monthly income. With monthly living costs we are going backwards and using up our RRSP money and savings to survive.
We No longer qualify for HELOC due to our retirement income, and current downsizing is not feasible due to the hot housing market ( selling for $200-300k over asking)
We are now considering CHIP. As a 10 year plan (then hope to downsize) we are offered a Variable rate 4.09%. In 10 years if we then sold and downsized, we would owe the $300k plus $149K (total $449k) If our current house continues to go up in value (say 3% per year as being very safe) Our house equity in 10 years would be +$297k higher than it is today. Thats still $148k positive equity all while Not paying a mortgage for 10 years. I agreed that if you go 15, 20 years or more the CHIP owing starts to get a ton more. We’re trying to live our next 10 Golden years now while we can, then be happy with a downsize and Silver or Bronze years with whatever we have left. (we would be near 75yrs old by then and less likley to have the lifestlye we are currently seeing ourselves living then next 10 years) I know for a lot of people CHIP might be a bad idea, but Always looking for feedback if this makes sense for us. Cheers all !!
Wow…. I’m happy a came across this article and the comments!!
I was considering either a HOLEC or a Reverse Mortgage to access the equity that’s built up in my house. But the interest rate on a Reverse Mortgage was ‘bugging’ me for some reason.
I didn’t know, nor is it mentioned by the providers, that their interest rate is compounded.
So with that in mind increasing my small HELOC, taking on a mortgage if possible, or downsizing makes more sense now.
Thank you ‘retirehappy’ and all those that commented.