COLUMN: Ask the Money Lady – Reverse mortgages

Dear Money Lady, could you write about reverse mortgages – I am not sure if I should consider one. Alma

Dear Alma – that’s a great idea and I know others would like to know too. Reverse mortgages have their place as a viable equity product and there are only two Schedule-1 Banks in Canada that offer them: Home Equity Bank (HEB) and Equitable Bank (EQ Bank). Most of the time this product is sold through a mortgage broker and is designed to meet the needs from aging homeowners that cannot qualify because they no longer work and live on a small, fixed income. This type of equity-take-out loan allows someone to access a portion of the value of their primary residence without selling it or making monthly payments to repay the debt. Now before you get too excited, let’s discuss the pros and cons of this product.

To be eligible for a reverse mortgage you must be 55 or older and own your home. The matrix for qualification is based on three criteria: your age, home value, and location. Of course, the amount provided by the lender will be higher if you live in an urban center as opposed to rurally, and you can choose to get a lump sum payout or have a scheduled payment setup. There are many different types of reverse mortgage products with some that are fully open and others that are locked in. The setup and cessation fees are quite high and of course you will need to do this through a real estate lawyer because a lien will be placed on your property for the loan. Both lenders will also require a sign-off from independent legal advice (ILA) to ensure you understand the requirements and ramifications of this product.

Obviously, the pros to reverse mortgages are that you can truly age in place since you will not be required to make regular loan payments and you can turn the value of your home into cash without having to sell it. The cons would be that it is quite costly to do so, with interest rates considerably higher than most other types of mortgages. I have had both lenders (HEB and EQ Bank) as sponsors to my shows on CTV across Canada and each have provided in depth information about their product offerings. The issues I see for Canadians is going to be your age at the time of the application. Although they say you can apply at 55, the cost to get a reverse mortgage at this young age will be considerably higher compared to someone who applies at, let’s say 80+. Your age and the type of residence are going dictate the percentage you will be charged, with many homes like condos will not even be considered in some places across the country. The other issue you will need to contend with, is that this product will run like a traditional mortgage with a set term. So that means, as a new client you most likely will get a good rate to sign on for a 5-year term, but then after 5 years you will need to refinance it into another 5-year term at a new rate (which most likely will be higher than the original intro-rate). Honestly, this product really only makes sense for those Canadians that are over 80 years of age and are looking for ways to create an additional revenue stream to age in place. Remember you will not be making any payments on this loan, so with each passing month, interest will accrue and compound over and over again. The other problem is that when you die, your estate must repay the loan + interest + fees within a set period of time after your death, regardless of how long it takes to settle your estate; leaving the onus on your beneficiaries to settle-up quickly.

I know there are many retirees that have considered this option, and if this is what you would like to do, let me offer you a way to lower the overall interest. Both banks are going to want you to take a lump sum once you qualify, but if you do so, interest will be continually added to your loan each month, basically paying interest upon interest. Why would you take a lump sum amount, only to be able to see it in your bank account but have to pay compounded interest on these funds that you may not use right away. Instead, go ahead and get approved for a set amount, and ask the lender to provide you with a set monthly payment so you only get charged the interest on the amounts you withdraw over time. This way, your overall interest will be less, and you now create a controlled revenue stream that you can count on to age with certainty. Honestly, I would rather you think of a reverse mortgage as not as an added benefit to owning a home, but as a tool of last resort to be considered in your older years, when every other resource or option has been exhausted.

Christine Ibbotson is an author, finance writer and syndicated money coach on BNN Bloomberg. She is also part of the everyday lineup on CTV Your Morning in every province. Follow Christine on Instagram @askthemoneylady, or on Facebook (Christine Ibbotson) and join her at her vibrant living speakers events.