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January 22^th 2022 - Philip Roe

Though some experts may not like it, reverse mortgages have become an essential finance option for Canadian retirees. Though there are misconceptions about reverse mortgages, they provide options for those nearing retirement age.

Whether it be to provide supplementary income, pay off debt, perform home renovations, or any other reason, Canadian seniors can use reverse mortgages for whatever they want. That kind of flexibility is important and can’t be easily matched.

Understanding reverse mortgages and what they can offer is important to aiding in the decision-making process. We will cover the misconceptions about reverse mortgages and the benefits that they offer to Canadian seniors everywhere.

Misconceptions About Reverse Mortgages: Growth

The first major misconception about reverse mortgages is that they are bad for seniors, particularly with children. If that were the case, then it would make no sense that Canadian mortgages have growth by a whopping 28 percent annually.

If anything, that just goes to illustrate that reverse mortgages are providing serious options for Canadian retirees. More Canadians than ever are entering retirement cash poor and home rich. This means that they have a ton of equity in their home even if they don’t have a lot of cash on hand.

With the rise in living costs, higher health care expenses, inadequate pension plans, and longer than ever life expectancies, Canadian retirees find themselves in a financial struggle. So, it should come as no surprise that they are growing at a rapid rate.

Reverse mortgages let homeowners cash out on the equity that they have built in their home and use it however they want. Most importantly, there is equity remaining in the home at the end of the term. That is a level of flexibility that is unmatched for Canadian retirees.

Even better, reverse mortgages can be used for just about anything. Pay off debt, perform renovations, pay for healthcare expenses, and a litany of other things can be paid for with the funds from a reverse mortgage.

The loan does not come due until certain aspects have been triggered. When the homeowner sells or moves, for instance. Or, should the titleholders pass away, the estate would be responsible for paying back the reverse mortgage.

Misconceptions About Reverse Mortgages: They are the Same as the U.S.

Reverse mortgages are the same everywhere, right? Wrong. Though the United States also offers reverse mortgages, they are not the same product. There are differences to be aware of that can properly illustrate the U.S. reverse mortgage from the Canadian one.

Maximum Amount. In the United states, the maximum value that can be borrowed is $625,000. If the home is under that value limit, the borrower will have access to 50% of the home’s value. In Canada, homeowners can borrow up to 55% of the home’s value, maintaining equity while providing necessary cash.

Eligibility. The eligibility is perhaps the biggest difference. In Canada, all persons on the title need to be at least 55 years old. Until recently, American reverse mortgages dictated that only one of the homeowners had to be 62 years old. Due to serious negative impacts, that has changed to anyone on the title.

Approval Process. In the United States, the Consumer Financial Protection Bureau is the agency providing counselling for reverse mortgage applicants. In Canada, the borrower has to obtain independent legal advice before they can be approved for this kind of mortgage.

Costs. In Canada, you can expect to pay the aforementioned independent legal advice, the closing and admin fees, as well as the appraisal fee. More often than not, those fees can be implemented into the mortgage loan with the only up-front cost being the appraisal fee.

In the United States, there are origination fees, third party charges, mortgage insurance premiums, and servicing fees. The insurance premium is generally 0.5% of the loan amount and the origination fee is based on the value of the home and cannot be more than $6,000.

The Most Common Misconceptions About Reverse Mortgages

Now that we understand some of the basic differences, including the fees involved, it is time to cover the misconceptions about reverse mortgages. Believe it or not, there are quite a few misunderstandings surrounding reverse mortgages.

Understanding the facts, the benefits, and the options provided by reverse mortgages can be important during the decision-making process.

You Won’t Own Your Home

Perhaps the largest misconception about reverse mortgages is that you won’t own your home anymore. That couldn’t be further from the truth. Even after taking out a reverse mortgage, you will not only to continue to own your home, but you will hold the title and have complete control over the home. This is exactly as it would be with a traditional mortgage.

With a reverse mortgage, the bank can’t make you sell, and you can continue to live in the home for as long as you want. The only obligation with a reverse mortgage is that the home has to remain well-maintained and both the insurance and property taxes need to remain current.

You Owe More Than Your House is Worth

Another complete fallacy. Lenders can guarantee that so long as the obligations on the reverse mortgage have been met, borrowers will not owe more than the worth of the home. Over 99% of homeowners retain equity int heir homes when they do decide to sell with most having more than 50% of the value of the home left after paying off the reverse mortgage.

That means that when the reverse mortgage is paid off and the house is sold, there is quite a bit of money left over. Simply put reverse mortgages provide flexibility like no other type of loan available to borrowers.

You Can Be Evicted if You Don’t Make Payments

Believe it or not, this is one of the most common misconceptions about reverse mortgages. In no way can you be evicted from your home for missing a payment because there are no regular payments due with a reverse mortgage.

In fact, that is one of the selling points for this type of loan. Borrowers can opt to pay interest as they go but it isn’t required. The principal and the interest become due at the end of the term, however that is achieved. Borrowers are never in danger of being evicted from their home.

Arranging a Reverse Mortgage is Very Expensive

While there are definitely fees and costs involved in a reverse mortgage, it is no more costly than a traditional mortgage. Those mortgages that we are all familiar with come with the need for independent legal advice and property appraisal.

Additionally, there are other costs involved with traditional mortgages that the uninformed may not be aware of. With reverse mortgages, the only up-front costs are the closing and administrative fees. Even then, those can typically be rolled into the loan amount.

Compared to the alternatives, like downsizing or selling the home, a reverse mortgage tends to be much more affordable while providing greater flexibility.

The Greatest Misconceptions About Reverse Mortgages Involve Interest Rates

Let’s get something straight: reverse mortgage rates are indeed higher than traditional mortgages. The misconception is that they are excessively higher than traditional mortgages and that is simply not the case.

Rates recently came down to about 4.49 percent, which is just shy of 2 percentage points higher than traditional mortgages. Compared to other avenues – like lines of credit or unsecured loans – that is extremely reasonable. A line of credit, for instance, could cost anywhere from 10 to 25 percent in interest rates.

Reverse mortgages are higher simply because they require no monthly repayment. The fees are generally the same and the rates have become so affordable that there isn’t a major difference between the two.

Moreover, a great deal of Canadian retirees can’t afford to make that monthly mortgage payment. And since traditional mortgages are based on income anyway, they may not even qualify for that kind of mortgage.

Reverse mortgages provide greater flexibility and immediate access to the entire sum, whereas a traditional mortgage does not. You pay a little more for flexibility and access to funds, but not excessively so.

Your Children Will Lose the Home

When the titleholders on the home pass away, the estate is responsible for paying back the loan. Because of this fact, there is a misconception that the children will lose the family home trying to repay the reverse mortgage.

That is simply not true. Since there will never be more owed than market value, heirs can pay off the reverse mortgage and keep the property. Again, reverse mortgages are primarily based on flexibility and availability of funds. Selling the home is not required, it will remain up to the estate and the heirs involved.

You Have to Pay Mortgage Insurance

Another misconstrued fact that is simply not true. In some countries, insurance is required on reverse mortgages but that is not the case in Canada. Depending on the lender involved, there may not be a requirement for mortgage insurance.

Check with the lender that you plan on borrowing from for more information.

Setting Misconceptions About Reverse Mortgages Straight: What Happens When You Move, Sell, or Pass Away?

So, now that we know all about reverse mortgages, there is one more thing to cover. When you sell the home, move, or pass away, what happens to the reverse mortgage? These are all triggers that require the loan to be paid off.

Should you decide to move, making the home your primary residence no longer, the loan will come due within 180 days. There is also the instance of moving to a care facility. Depending on the lender, you may qualify for up to 50% off of the pre-payment amount.

If selling the home becomes the right option, the reverse mortgage will need to be paid off by the closing date. Check the details; they should be covered during the application process, so just be aware of them before agreeing to anything.

If one of the homeowners winds up passing away, the other person on the can continue living in the home without needing to pay the loan. But when both title holders pass away, the executor of the estate will need to provide a death certificate. This will facilitate the time period necessary to pay off the loan amount.

The heirs of the estate then have the option to pay off the loan or sell the home. The latter often times results in a large sum left over even after settling the reverse mortgage. For more details, check with the lender first.

Who Do I Talk to Regarding Misconceptions About Reverse Mortgages and How to Apply?

The first place that you need to start when inquiring about reverse mortgages is with the team here at Lotus Income. We have years of experience that can get you the answers that you need. The most important thing when it comes to finding a reverse mortgage is knowledge. Have the answers that you need to get the right loan for you.

Reverse mortgages have their own unique set of pros and cons and definitely are not suitable for anyone who qualifies. Discussing with a professional is a great first step and will at least give you a better understanding of this type of loan.

Call our team today or check out our FAQ page to find the answers to your questions. Getting started today is easy. Find out if a reverse mortgage is the right move for you.