Unravelling Reverse Mortgage Myths in Canada
Reverse mortgages are a financial tool that allows homeowners, typically seniors, to access the equity in their homes without selling.
This option has gained popularity recently, but many people still need to learn about the facts surrounding reverse mortgages.
This article will address some of the most common misconceptions about reverse mortgages in Canada, provide advice and recommendations on various aspects, and share examples to illustrate key points.
This article will also provide up-to-date information to help retired Canadian homeowners over 55 decide on this unique financial option.
Reverse Mortgages are Legitimate: Reverse mortgages are offered by Canadian banks regulated by the same government agency (OFSI) that governs the rest of the banking industry. OSFI sets guidelines and enforces rules to ensure that reverse mortgage lenders are legitimate.
Reverse Mortgages Protect Homeowners: In Canada, reverse mortgages come with several safeguards to protect homeowners from losing their homes:
No negative equity guarantee: This guarantee ensures that a homeowner or their heirs will never owe more than the home's fair market value when the reverse mortgage is due for repayment.
Homeownership retention: Homeowners retain the title to their homes throughout the life of the reverse mortgage. They can continue to live in their homes and are only required to make payments once they decide to sell the property or pass away.
Myth #1: Reverse Mortgages Are Provided by Scammers
A common myth surrounding reverse mortgages in Canada is that they are a scam to exploit vulnerable seniors. This notion has led to unnecessary fear and mistrust of a financial tool that can benefit homeowners in their golden years.
Who Provides Reverse Mortgages
In Canada, any bank that offers reverse mortgages is regulated by the Office of the Superintendent of Financial Institutions (OSFI).
OSFI sets guidelines and enforces rules to ensure that reverse mortgage lenders adhere to strict standards, maintain transparency, and offer products that protect consumers' interests.
Reverse mortgages are a legitimate financial product that homeowners should consider.
Learn more: How Does a Reverse Mortgage Work in Canada?
Myth #2: My Family Will Be Liable After I Die
Another common misconception about reverse mortgages in Canada is that they leave heirs burdened with a significant debt to repay.
This misunderstanding can lead to hesitation among seniors considering a reverse mortgage, as they worry about the financial implications for their loved ones.
What Happens When I Die?
When a reverse mortgage becomes due, the homeowner or their heirs must repay the loan, typically using the proceeds from the home's sale.
Here's how the repayment process impacts heirs:
Repayment using home sale proceeds: Selling a home can be an incredibly beneficial move - not only does it provide the homeowner's estate with capital to distribute amongst heirs, but allows for repayment of any outstanding reverse mortgage loans. The remaining equity belongs entirely to the original owner and their family, giving them one final chance at financial security in this life or beyond.
No negative equity guarantee: Reverse mortgages in Canada usually have a "no negative equity guarantee.", guaranteeing the homeowner or heirs will only owe the home's fair market value when the loan is due for repayment. The homeowner or their heirs will not be responsible for any loan balance that exceeds the home's value. Traditional mortgages require the homeowner or heirs to pay for any shortfall owing.
Option for heirs to keep the home: If heirs wish to keep the home rather than sell it, they can repay the reverse mortgage using other funds or refinancing the property with a traditional mortgage, allowing them to retain the family home while satisfying the reverse mortgage debt.
Learn more: How Does a Reverse Mortgage Work When You Die?
Myth #3: Reverse Mortgage Interest Rates are Unreasonably High
With a reverse mortgage, seniors can tap into their home's equity to enjoy newfound financial freedom - without uprooting and moving. Despite the popular misconception that these mortgages carry “criminal” interest rates, they are reasonable considering the benefits they provide a homeowner in retirement.
How Do Reverse Mortgage Rates Compare?
Reverse mortgages offer the benefit of obtaining a loan without making monthly repayments. In exchange for this benefit, reverse mortgage interest rates are typically 1-2% more than traditional mortgages and HELOCs, which require monthly repayments that may burden anyone on retirement income.
Keep in mind that reverse mortgage interest rates are lower than personal loans or credit card costs. Overall, reverse mortgage interest rates are in the middle of the borrowing cost range for Canadians.
Remember since the banks that offer reverse mortgages are regulated like all other banks in Canada, they cannot charge a “criminal” rate of interest.
If you are concerned about the borrowing costs of reverse mortgages, you should consider options like a traditional mortgage or a HELOC first.
However, since those options will review your income, you will likely NOT be approved for the loan amount you want if you are retired and receiving pension income.
In these circumstances, a reverse mortgage should not be considered a bad option.
Myth #4: The Bank Will Own My Home
Many homeowners think as part of the reverse mortgage, and the lender will own their home afterwards.
Who Will Own My Home?
You will continue owning your home after you get a reverse mortgage. The reverse mortgage will be registered on the title like a traditional mortgage, and no change will be made to your home’s ownership.
Like anyone who gets a traditional mortgage or HELOC, the homeowner will have some responsibilities going forward and will not lose their home as long as they meet these requirements.
These requirements typically include the following:
Maintaining the property: Homeowners should take great care of their homes, which can be a significant advantage when tapping into reverse mortgage opportunities!
Paying property taxes: The homeowner must continue to pay property taxes on time.
Having home insurance: The homeowner must maintain proper home insurance coverage.
Myth #5: You Must Be Mortgage-Free to Qualify for a Reverse Mortgage
Even if your existing mortgage isn't completely paid off, it's still possible to get a reverse mortgage.
What Happens to My Old Mortgage?
If you have an existing mortgage on your property, you can still qualify for a reverse mortgage.
The extra funds from the reverse mortgage could enhance your retirement lifestyles – such as making improvements around the house, covering medical costs and more.
Advice and Recommendations
Do your research: Review the various reverse mortgage products available in Canada. Consider the multiple interest rates and associated fees, then compare options. Check your reverse mortgage suitability by using a free online reverse mortgage calculator that does not require you to provide any personal information.
Make sure it's an informed choice so you can feel confident you made the right decision for your circumstances.
Consult a financial advisor: Does your research cause undue stress?
A trustworthy advisor can help you decide if a reverse mortgage is right. Take advantage of their experience, and remember, if you work with advisors at RetireBetter, consultation is free!
Understand the terms and conditions: Before signing a reverse mortgage, thoroughly examine the contract to ensure you're comfortable with any obligations and potential risks.
Don't skip over this critical step in the process – it's essential for protecting yourself!
Reverse mortgages can be a valuable financial tool for seniors, but misconceptions can lead to unnecessary concerns or missed opportunities.
By understanding the facts and seeking professional advice, seniors and the general public can decide whether a reverse mortgage suits their circumstances.