Reverse Mortgages and Home Equity: Can You Lose Your Home?
“Reverse mortgages are a scam. The bank will end up taking your house.”
“You’ll lose all your equity after you get a reverse mortgage and will have nothing to leave behind for your kids.”
“Once you take a reverse mortgage, it’s only a matter of time before you’re kicked out.”
These are just a few of the common things people say about reverse mortgages.
Misconceptions like these have been circulating for years, making homeowners—especially seniors—hesitant to consider what could otherwise be a helpful financial tool.
The truth is, reverse mortgages don’t mean losing your home or equity.
On the contrary, reverse mortgages offer homeowners a way to stay in their home while accessing the wealth you’ve built in it.
In this article, we’re going to bust the myth that a reverse mortgage will lead to losing your home or your equity. If you are worried that you will run out of equity by getting a reverse mortgage, then this article is for you.
We’ll also explain how home appreciation and the growth in property values can work in your favor, helping you keep your equity over time.
Where Do These Misconceptions Come From?
First, let’s address why so many people think reverse mortgages are a bad idea.
These misconceptions didn’t just appear out of nowhere. Based on my experiences and many conversations with industry insiders and clients, here’s where these reverse mortgage myths generally come from:
- Old Stories from the Past
Years ago, reverse mortgages weren’t as well-regulated as they are today.
Some early borrowers, especially in other countries like the U.S., ended up in bad situations because of unclear terms or even predatory lending.
These stories made the headlines, and even though reverse mortgages have changed for the better, those old tales stuck around.
Are reverse mortgages perfect? Of course not.
But the media loves a dramatic story, and sometimes the rare cases where people have struggled with reverse mortgages get a lot of attention.
Unfortunately, positive stories—where a reverse mortgage has helped someone live more comfortably in retirement—don’t always make the news and represent the silent majority of cases.
This unbalanced media attention can lead to an unbalanced view of reverse mortgages by the public.
Learn more:
Reverse Mortgage Horror Stories
- Reverse Mortgages Can Be Complicated
In my experience, most people have a basic understanding of traditional mortgages—but an understanding of reverse mortgages?
Not so much.
Based on my discussions with homeowners over the years I would say the following is generally true for most homeowners:
- They do not know how a loan amount for a reverse mortgage is determined; and.
- They do not understand the importance of a homeowner's age.
People generally understand that the loan balance grows over time but beyond this…their understanding gets a bit fuzzy.
Unfortunately, this lack of understanding does not stop people from sharing their views about the suitability of reverse mortgages!
(We’ll discuss this more in the section below about social media)
Learn more:
What is the Best Age to Get a Reverse Mortgage
- Fear of Debt in Retirement
There’s a strong traditional belief that being debt-free in retirement means a “successful” life—such a person is a “winner”.
The flip side means…well, you know…
As a result, for many people, the idea of taking a reverse mortgage—something that, on a basic level, increases debt—feels wrong, even if it might be a helpful solution.
I think it’s fair to say that once people retire, they generally do not want to do anything with their debt other than pay it down.
Converting existing debt into a reverse mortgage is not popular and most people do it reluctantly.
Many people tell us they want to do nothing with post-retirement debt out of fear they are “just going to make things worse.”
But the debt is not going to just disappear, is it? And so we guide people into looking at all of their options in an objective manner.
If you’re 69 years old and have post-retirement debt, is it really going to be paid down anytime soon?
And if it’s not likely going to be paid off anytime soon, we ask people to consider the quality of their life in these situations.
Because, in our view, ultimately that is the only thing that matters.
This guilt of having debt in retirement, taken together with the poor reputation of reverse mortgages means that you will come across a lot of people discouraging you from taking a reverse mortgage.
Traditional financial advisors…neighbours...friends..family…especially children…they all discourage a homeowner from getting a reverse mortgage.
The cycle of negativity...and misinformation just continues.
- Social Media Amplification
Cycles of negativity and misinformation are a perfect way of describing the role social media plays in the perception of reverse mortgages.
Social media has given everyone a platform to share their experiences, opinions, and unfortunately, misconceptions.
When it comes to financial products like reverse mortgages, social media amplifies these misunderstandings about reverse mortgages.
“A lie told often enough becomes the truth.” Lenin
Negative stories or myths spread quickly and can be taken as truth, even when they’re not based on fact.
Even if people know the truth, they keep silent. This phenomenon is known as the “Spiral of Silence”.
In simple terms, if you believe your view is unpopular, you won’t say it out loud.
If you believe your view is popular, you will say it out loud.
Right or wrong doesn’t matter—it's what you believe.
This theory explains how a “vocal minority” can control social media.
Negative views of reverse mortgages (no matter how wrong they are) flood everyone on social media.
Fighting that current of negativity is hard work. People who are happy with a reverse mortgage have no incentive to fight this online negativity. So they happily live their lives and keep silent.
And so again, the cycle of negativity surrounding reverse mortgages just continues.
How Reverse Mortgages Really Work
Now that we know where the misconceptions come from, let’s clear up the confusion about how reverse mortgages work.
A reverse mortgage is a loan that allows homeowners, typically 55 and older, to tap into the equity they’ve built up in their home.
The loan is repaid when you sell your home, move out, or pass away, but until then, you keep full ownership of your house.
You are not required to make monthly payments, so you won’t have that financial burden hanging over you in retirement.
You do have the option of making monthly payments with a reverse mortgage and can also make annual prepayments if you want to reduce the amount owing when the loan becomes due.
Learn more:
How Does a Reverse Mortgage Work in Canada
The reverse mortgage loan amount will be based on the homeowner’s age and the property value: the older the homeowner, the more they can qualify for but a loan amount will not exceed 59% of the value of the home.
The opposite is true: a younger homeowner will be approved for less.
Learn more:
What Are the Age Rules for a Reverse Mortgage?
Essentially, a reverse mortgage lender will only approve the homeowner for a loan amount that is expected to remain less than the value of the home over the life expectancy of the homeowner.
Why is the reverse mortgage lender being so careful to look at the property value, your age, life expectancy, etc. when looking at a loan application?
The lenders do this type of analysis because they do NOT want to take your home. It is NOT a viable business model for a bank to take their customers’ homes!
Quite frankly, “stealing” homes from borrowers is not profitable for them and would be a public relations nightmare for them.
Also, the banking regulator expects them to review all loan applications to make sure a loan is properly managed to avoid this type of outcome.
By doing this analysis, the lender will only approve the homeowner for a reverse mortgage loan that is expected to leave the homeowner with equity when the loan becomes payable.
What does it all mean for a homeowner? I would sum it up as follows:
With a reverse mortgage, a homeowner:
- Can stay in their home for life and access their equity for any purpose without selling their home; and
- Will only be approved for a loan amount that should ensure there is equity for the homeowner when the loan is repaid
In order to make sure the homeowner has equity when the loan is repaid, a reverse mortgage lender needs to consider whether the property will increase in value over time.
The Role of Home Appreciation
If I had a dollar for every time a reverse mortgage “critic” forgot to consider property appreciation in their argument.
Home appreciation is the reason reverse mortgages work so well for homeowners.
In Canada, the real estate market has shown steady growth for many years.
According to RetireBetter analysis of data from the Canadian Real Estate Association (CREA), the average annual home appreciation rate since 2005 has been 5.49%.
And so while it’s true that the balance of your reverse mortgage increases due to interest, it’s also true that your home’s value will likely increase at the same time.
If your home value is increasing, it can preserve your home equity despite the growing loan amount of the reverse mortgage.
Let’s Look at Some Numbers
To help you understand how this works, let’s break it down with some simple numbers.
Imagine you’re 55 years old, own a mortgage-free home worth $1 million and take out a reverse mortgage for $350,000.
Over time, the mortgage loan balance will grow as interest is added, but your home’s value is likely to grow as well.
We ran various scenarios of this example, using different rates of home appreciation, ranging from 1% to 5% annual growth.
Here’s how different appreciation rates can affect your home equity:
While an image is worth a thousand words, the above chart means the following:
- If your home appreciates by 5% a year, you will not run out of equity because the equity will grow faster than the loan balance.
- At 4% annual growth, it will take 42 years before you run out of equity.
- At 3% growth, it will take 30 years before you run out of equity.
- At 2% growth, you’ll have equity for 24 years.
- At 1% growth, it will take 19 years before you run out of equity.
Remember, the homeowner is 55 years old too in this situation—meaning they are well into their 70's, 80's or90's before they run out of home equity.
Overall, our analysis of Canadian real estate data shows that even with modest appreciation, you can hold onto your equity for decades. And if the market keeps growing at around 5.49%, like it has historically, you may never run out of equity at all!
How Equity and Loan Balances Work Together
A major concern people have with reverse mortgages is how the loan balance grows over time.
It’s true that the amount you owe increases over time because interest is added to the loan.
But when you compare this interest growth to how much your home’s value is likely to appreciate, you’ll see that you’re still likely to hold onto a good portion of your equity.
Take our earlier example of the homeowner with a $1 million property and a $350,000 reverse mortgage.
Even at a relatively low 3% annual appreciation rate, this homeowner would keep equity for 30 years.
In our example, that means the homeowner would need to survive until they are 85 years old before they run out of equity.
According to Statistics Canada, the average life expectancy for Canadians is now 83 years.
For most Canadians, the historical annual appreciation rate of 5.49% means the risk of losing all your equity is very low.
In fact, in many cases, a homeowner’s equity will grow despite the reverse mortgage.
Going back to our example, the homeowner had $650,000 in home equity after they took a $350,000 reverse mortgage. I’ve shown this example by using HomeEquity Bank’s CHIP Reverse Mortgage financial illustrator:
In 20 years, with 5% annual home appreciation rate, your home equity would double to $1,229,615:
Even if we used an annual home appreciation rate of 4%, your home equity would increase to $767,440:
In this example, it’s not until we start using a home appreciation rate of 3% or less until we see a homeowner’s equity go down.
Even using a 3% home appreciation rate though, a homeowner in our example would still have $382,427 in equity left after 20 years of having a reverse mortgage:
Once a person looks at the historical Canadian real estate data on property appreciation, and sees how home values, home equity and reverse mortgages interact, it becomes clear that most people who take a reverse mortgage will NOT lose their homes, and will have sufficient equity when the loan is paid.
Reverse Mortgages Are a Financial Tool, Not a Trap
At the end of the day, a reverse mortgage is a tool for homeowners who are over the age of 55 in Canada.
It’s not a “last resort” or a financial trap.
It’s a way for retired homeowners to access some of the wealth they’ve built up in their homes without needing to move or sell.
Whether you need extra income to improve your quality of life, pay for home improvements, or cover unexpected expenses, a reverse mortgage can be a smart financial option.
For many homeowners, especially those who are mortgage-free in retirement, a reverse mortgage can be a way to enjoy the fruits of your hard work.
If your home is appreciating, you’re likely to keep equity even as the loan balance grows.
The key is understanding how the product works, making sure it’s the right fit for your financial goals and working with an experienced advisor on Canadian reverse mortgages.
Talk to RetireBetter About Reverse Mortgages
The idea that a reverse mortgage will leave you without a home or equity is simply a myth—the extensive data on the Canadian real estate market proves this popular belief just is not true.
While the loan balance does grow over time, so too does the value of your home. And with the steady appreciation of Canadian real estate, most homeowners will continue to hold onto their equity—or even grow it—while benefiting from the flexibility and financial freedom a reverse mortgage provides.
If you’re curious about how a reverse mortgage might work for you, contact RetireBetter today.
We’re here to help you understand your options and can easily provide you with a customized financial illustration to cover your particular circumstances.
