You’ve probably seen the ads on television with smiling retirees claiming financial freedom through a reverse mortgage. Could it be an option for you, your parents, or other loved ones?

How it works

A reverse mortgage is the opposite of a typical mortgage. With a typical mortgage, you are loaned a specific amount of money from your lender and you pay them back, with interest, over time. A reverse mortgage, however, involves you borrowing money from the home equity that you’ve accrued in the property. There are no payments to be made; the balance and interest gets added to your current mortgage and it gets paid off by your estate when you die or eventually move out of your home.

Part of the problem with owning a home and staying in it for the long haul is that it often ends up being your largest asset, and it’s not liquid, so you can’t tap into it easily if you need cash. Even though your mortgage payments tend to be lower the longer you stay in your home, your income also tends to decrease, and cash flow could become a problem if you want to maintain your standard of living.

A reverse mortgage aims to be a solution to that problem. It’s an increasingly popular option in Canada, as HomEquity Bank, the only provider of reverse mortgages in Canada, reported a 26 per cent rise in reverse mortgage sales with a total of $459 million in 2016.

“I think our media and our advertising has a lot to do with it, bringing awareness to the community,” says Andrea Twizell, national partnership director for mortgage brokers at HomEquity. We deal with all the banks and the brokerage firms, so the more people you have out on the street and the more awareness you’re bringing to attention, it certainly makes a difference.”

Mortgage Broker Direct, which is the division Twizell runs, showed broker market growth of 85 per cent between January and February of 2016 versus January and February of 2017. This growth is spread across Canada, and although the average mortgage size is around $250,000, the largest funded reverse mortgage was $2.5 million in 2016

Who can take out a reverse mortgage?

Reverse mortgages are limited to homeowners aged 55 or older.

There are, of course, other ways to access your home’s equity, such as a home equity line of credit (HELOC) or other line of credit. These are both subject to qualification requirements, however, such as income and debt requirements, while a reverse mortgage is solely based on the equity in your home, the type of property as well as its location, and your age. You may take out up to 55 per cent of the total value of the home. Another important distinction when comparing types of equity takeouts is that a HELOC requires the interest payments to begin immediately, while payments are not required from a reverse mortgage.

The reasons why someone might take out a reverse mortgage could be similar to why people might take out a line of credit, although given the age requirement, some reasons might be different.

“Outside of them paying off debt, they use it for healthcare. People who are sick that want to stay in their home but need 24-hour care, that costs money so they take the equity from their home for that,” Twizell says. “They also take out mortgages to help their kids; we call it an early inheritance, so they’re taking out money so that their kids can buy homes because the changes in the mortgage rules puts a lot of people out of the market and they need more down payment now. So where do you get that money from? This is a source of that. It’s also the quality of life. A lot of people that retire want to travel, they want to be snowbirds but they don’t have the money to buy a place in Florida and don’t want to give up their house. So they could take the equity out to buy an investment property or a seasonal home.”

There are two types of reverse mortgages available. The first is HomEquity’s CHIP program, where you take a lump sum, and there’s also a product called Income Advantage, where you can take up to 40 per cent of the value of the home either through monthly withdrawals or planned advances. If you decide to take periodic withdrawals, then the interest isn’t charged on the entire amount the way it would be with a lump sum payout; it’s only charged on the amount that’s being used. In this way, it’s very similar to a line of credit.

Not for everyone

Unlike a term period of a conventional mortgage, where you can change everything about it at the end of a term, a reverse mortgage isn’t something that you can decide to opt out of another five years down the line. The only way out of a reverse mortgage is to pay up, and when you sell your home or die, everything is due.

Some people don’t find reverse mortgages attractive because they just don’t like being in debt. If you’re one of those people who has worked hard to pay off your mortgage and own your home outright, then you might not be too crazy about owing money again, even if you don’t have to make payments. There’s also a loss of security against fluctuations when it comes to home prices.

“I guess the down side is that you’re using equity from your home, however no monthly payments are required which is what clients need to stay in their home,” Twizell says. “Me, personally, from working here and helping clients, I don’t see a down side at all. Because the reason why anybody’s taking out this kind of mortgage or dealing with us is that there’s a solid reason for it, be it helping out your grandkids or renovating your home.”

When does it make sense?

Because of the age limits, reverse mortgages are intended for those people who are retired or close to retirement age, and have a good amount of equity in your home.

Obviously the number one reason to get a reverse mortgage is that you want to stay in your home for the rest of your life, whether that’s because of sentimental reasons, or because you don’t want to deal with the hassle of selling your home and moving. And although some of your expenses may have been eliminated or have decreased significantly over the years, other expenses may be creeping up, such as medical costs. A reverse mortgage is basically a good way to augment your monthly income. You will need to keep current on your property taxes, your home maintenance, and insurance, but the money that you get from the reverse mortgage can help you with those payments (which tend to increase as the years go on).

If you don’t have any other debt outstanding, or don’t particularly want or need to pass your home or the cash from it onto your children or a relative, then a reverse mortgage is also good option, as it is the only way to access your home’s equity without having to make payments or selling your home and moving.

Risks

Like any mortgage product, there’s less risk if it’s a good fit in the first place. And, as Twizell adds, the lender is very cognizant of the fact that they’re dealing with seniors, many of whom consider their home as their only asset. Borrowers also have to get independent legal advice, so that they truly understand what type of product they’re getting into.

“We lend very conventionally and conservatively in the sense that we’re not going to put our clients in something that they’re not going to have something left at the end of the day,” she says. “In our commitment, we do guarantee that they never will owe more than their home is worth.”

In spite of its growth in popularity and the ability of consumers to access the products through brokers, bankers, credit unions, financial advisers, or even directly through HomEquity, people can still be wary of the product.

“A lot of people just feel it’s too good to be true,” Twizell says.

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