Baby boomers may be the most indebted generation of seniors in Canadian history. Boomers and the “Silent Generation” that preceded them owed over $4 billion in reverse mortgages in 2019. What they’re doing with all that spare change is anyone’s guess. Ski condo at Horseshoe Valley? Trekking around the Himalayas post-COVID?
Reverse Mortgage Uses Your Home Equity
Reverse mortgages have given older adults 55 and up a new level of freedom. They can pay off their home, borrow against it and never owe a dime, so it seems. The fine print is quite a bit different.
How Reverse Mortgages Work
Depending on your home’s condition, you could qualify for up to 55% of its value in a reverse mortgage. You get cash up front. Lenders such as HomeEquity Bank or Equitable Bank use your home to fund an annuity. They get paid back when you die, sell or leave. All you have to do is:
- keep your home in good condition
- use it as your principal residence
- pay the property taxes and insurance.
You keep the legal title and can sell at any time, provided you pay back the mortgage. Did we mention you’d owe interest if you did?
Tax-free Payments Save You Cash
Payments can be arranged as a single, lump sum amount, monthly deposits or both, to spend as you wish. Unlike a consumer loan, the mortgage won’t affect your income tax bracket. You won’t suffer claw backs of federal pension benefits (CPP, OAS or GIS) either. And you don’t have to repay it monthly, like you do when you take out a conventional mortgage.
High Cost of Borrowing a Reverse Mortgage
In reality, reverse mortgages come at a cost, including getting independent legal advice. Interest rates are higher than regular mortgages or a home equity line of credit (HELOC) and are added to the loan, which goes up the longer you keep your home. You pay a home appraisal fee, application and closing fees and a repayment penalty if you sell or move in the first three years. Home inspections, mortgage insurance to protect the lender, property title insurance — getting a reverse mortgage can be just as costly as buying a new home.
All the Costs of Homeownership, With Less Equity
You still have all the usual costs of owning a home — replacing the roof, installing that new furnace and painting the siding. Except now you may have less home equity if the upkeep exceeds your cash flow or other investments. Moneysense points out a $150,000 reverse mortgage on a $600,000 home would cost $205,695 in interest over 15 years. As long as your home appreciates an average of 2% to 5% a year, you’d break even or come out ahead. But if home values dipped just before you sold, that’s another story.
Stay Home or Sell
If you thought you’d travel or be a snowbird when you retired, you may have to go to Plan B. Your home becomes your principal residence when you have a reverse mortgage. Any vacancy past six months could trigger repayment. Moving to long-term care or assisted living will force you to sell or suffer foreclosure.
No Tax Benefits
Unlike “forward mortgages”, reverse mortgages come with no income tax write-offs for interest costs. As the title suggests, interest costs work in reverse. Instead of paying off interest every month, interest grows as the years go by. That interest is added to your loan. If the loan and interest amount exceed how much you borrowed, with no value left in your home, selling is pointless.
Scamming Vulnerable Seniors
It’s not hard to see how reverse mortgages can go horribly wrong. Not everyone can manage their money well enough to make a loan last the rest of their life. Once your home is gone, you’re out of luck when it comes to borrowing for extraordinary expenses like unanticipated medical bills.
How a Reserve Mortgage Affects Your Heirs
If your spouse dies and you are 62 or older and on the property title, you can usually stay in the home. The reverse mortgage will be due when you or the last surviving owner die, sell or move out. Anything left after the loan is paid goes to your heirs. On the downside, think carefully about what would happen if your home’s value declined. Are you comfortable knowing your heirs may be left out?
A Case of Misplaced Expectations
An Ajax woman got a shock when a $343,000 reverse mortgage her 75-year-old mother took out left less profit than she expected from the sale of their family farm. The daughter complained she wasn’t told about the mortgage. Her mother argued she owned the farm and had never signed away her right to borrow against it. She had merely agreed to share what was left after all the debts and realtor commissions were paid. Like most things in life, it’s complicated.
Get Legal Advice on a Reverse Mortgage
Axess Law Ontario real estate lawyers can review a reverse mortgage agreement to advise you on your legal obligations. Convenient online video conferences are available anywhere in Ontario, 7 days a week, day or evening. Make an appointment by calling toll-free to 1-877-552-9377 or 647-479-0118 in Toronto or using our online booking form. Our licensed Ontario lawyers can meet with you in person at our Toronto, Scarborough, Vaughan, Etobicoke, Ottawa, Mississauga Winston Churchill or Mississauga Heartland law offices.
Click here to learn more about Axess Law’s real estate law services.
Photo by Free Photos|Pixabay.