Is A Reverse Mortgage A Rip Off??

Some people believe that a reverse mortgage is nothing more than a “rip-off.”

You might have heard this sentiment from someone you know – or seen it online.

In this post, I’m going to take a closer look at that claim.

We’ll go through the real numbers, break down all the costs, fees, and interest, and see if any part of the reverse mortgage process truly qualifies as a “rip-off.”

As always, you can read the article below or watch the video version:

Definition Of Rip-Off

By definition, a “rip-off” is something that’s overpriced or not worth the money paid for it.

So to figure out if a reverse mortgage is a rip-off, we need to look at what you pay – and what you get in return.

Where Does The Rip-Off Concern Come From?

There are two things you pay for in a reverse mortgage:

1. The initial costs and fees to set it up.

2. The interest rate charged on the funds.

So, let’s break those down and see if either (or both) are overpriced or unfair.

The Costs & Fees Of A Reverse Mortgage

I have a detailed article on the costs & fees of a reverse mortgage that you should check out as well for a bit more information on these and the timing.

But essentially, reverse mortgages include the following setup costs:

• Appraisal

• Legal closing of the mortgage

• Lender administration fees

• Independent legal advice (ILA)

Let’s examine each one and ask: is this justified – or could it be called a rip-off?

The Appraisal

Virtually every mortgage in Canada requires an appraisal – it’s not specific to reverse mortgages.

The typical cost is $300 to $600.

I have a full article in which I cover the appraisal and establishing your home valuation you can read here.

Yes, it’s pricey, but it’s necessary.

Lenders need to verify the home’s value before approving any loan. Without it, they’re flying blind.

So, while expensive, it’s a fair and essential part of the process. Not a rip-off.

Legal Closing Of The Mortgage

This includes registering the mortgage and obtaining title insurance.

It usually costs between $700 and $1,700 – and it’s deducted from your mortgage proceeds (rather than being paid upfront).

That may seem high, but title issues can cost you far more if they’re not addressed.

In fact, Canadians routinely pay $1,000 to $5,000 per year (so maybe $40,000 to $100,000 over the life of a home) in home insurance.

So, even just for the cost of the title insurance this is worth it – title issues can cost you thousands of dollars, if not costing you ownership of your home even.

Furthermore, it’s a legal requirement to register a mortgage – something paid for on every single mortgage in Canada.

So in the big picture, this is fair. Again – not a rip-off.

Lender Fees

This is the first area where the rip-off question is more valid.

Lender fees typically range from $995 to $2,995 and are also deducted from the proceeds, not paid upfront.

Sometimes, they’re waived or reduced during promotions.

Sometimes they include the legal closing costs above, but not always.

While they’re certainly not cheap, they’re not unheard of in the industry either.

You won’t usually see these fees on a regular ‘A level’ mortgage (A level being for someone with excellent income and credit).

That is, the big banks wouldn’t charge a lender fee on a regular mortgage.

But on ‘B level’ mortgages (for those with less excellent credit or income), second mortgages or private deals then lender fees are quite common.

They can actually run between $1,000 and $10,000 – sometimes even more – on these kinds of mortgages.

So, compared to regular ‘A level’ mortgages, reverse mortgage lender fees look expensive. But compared to the alternatives, they’re actually on the lower end.

Still, this is one area where some may reasonably argue the fees feel steep and could be considered a ‘rip-off’.

Independent Legal Advice

Independent Legal Advice (ILA) is mandatory in most provinces.

It ensures that you fully understand the contract – and that someone impartial has reviewed the reverse mortgage with you.

It generally costs between $700 and $1,000 and are also deducted from the mortgage proceeds.

Because it’s a legal requirement, helps protect you and is done purely for your own benefit, it’s hard to argue this is a rip-off.

Even if you believed that was the case, there is nothing the lenders can do about it – you’d have to lobby the Government to remove the legal requirement (which is unlikely to ever happen).

Interest Rates

I’ve covered this in detail elsewhere – see my article Are Reverse Mortgage Rates Really That High? for example.

But to evaluate whether reverse mortgage rates are a rip-off, it’s important to see if the interest rates are a rip-off.

To do this, the starting point is to compare the interest rates to other available products in the market.

Different Products & Their Rates

When you lay them all out, reverse mortgage rates fall towards the bottom of the interest rates charged on borrowing money in Canada.

They’re generally the third lowest borrowing product available in Canada – sometimes lower than a Home Equity Line of Credit or Car Loan, sometimes a little higher.

That’s not what most people expect to hear – and it certainly doesn’t scream “rip-off.”

But this comparison isn’t actually fair and not really showing if they are a rip-off.

That is because most people over 55 who are considering a reverse mortgage don’t have strong income and some may not have good credit scores.

So in order to properly see if a reverse mortgage is a rip-off, you need to compare it to products more similar to a reverse mortgage – that don’t require strong income or credit scores…

Products You Can Get With Little Income & Average / Ok Credit Scores

When you limit the comparison to only those products that someone with limited income and average credit could qualify for, reverse mortgages are actually the lowest rate available in that category.

So if you can’t get an ‘A’ mortgage or a HELOC, a reverse mortgage becomes the cheapest borrowing option – making it tough to call that a rip-off.

But what about the loss of equity?

This is where some people get nervous.

The real fear is that a reverse mortgage eats away your home’s value over time.

So, let’s look at three real-world examples and do the math.

Home Equity – Example Calculation 1

For this example, let’s say you own a home worth $500,000 and take out a reverse mortgage of $100,000 (20%).

We’ll assume the home value grows at 4% annually and the reverse mortgage accrues at 6.5%.

(This interest rate is actually on the higher side for a reverse mortgage in the long-term, in the long-term I expect interest rates to be in the 6 to 6.5% range.  I also expect home value growth to be around 4% to 6%.  So, we’ll use the worst numbers to show the worst case scenario).

Here’s what happens in this situation:

• After taking the loan, you still have $400,000 in equity ($500,000 home value less the $100,000 reverse mortgage).

• It would take 68 years for the mortgage to catch up to and equal the home’s value.

Finally, here’s how your equity looks over time:

• After 5 years: $470,637 (An increase of $70,637)

• After 10 years: $550,538 (An increase of $150,538)

• After 15 years: $736,141 (An increase of $336,141)

Even with the loan and interest, your home equity is growing until many years into the future – because your home value is growing faster than the interest accrues.

Home Equity – Example Calculation 2

Now let’s keep the exact same circumstances and assumptions from the first example – but say you borrow double the amount – $200,000 (40% of your home’s value).

(Note that you’d likely need to be over 70 years old in order to borrow as much as 40%)

Here’s what happens in this situation:

• After taking the loan, you still have $300,000 in equity ($500,000 home value less the $200,000 reverse mortgage).

• It would take 38 years before the reverse mortgage equals the home’s value.

And here’s how your equity looks over time:

• After 5 years: $332,948 (An increase of $32,948)

• After 10 years: $360,955 (An increase of $60,955)

• After 15 years: $376,721 (An increase of $76,721)

So, your home equity is still increasing many years into the future – just at a slower rate.

And, again, it’s many more years before your home equity starts to decrease.

Home Equity – Example Calculation 3

Finally, let’s look at the absolute extreme example.

What if you borrow the maximum amount of reverse mortgage you can get – $275,000 (55% of the home’s value)?

Remember this is at the higher end of the rate and the lower end of home value growth.

You’d also need to be at least 80 years old (and most likely 85) in order to get the full 55%.

Here’s what happens in this situation:

• After taking the loan, you still have $225,000 in equity ($500,000 home value less the $275,000 reverse mortgage).

• It would take 25 years for the reverse mortgage to match your home’s value.

And here’s how your equity looks over time:

• After 5 years: $229,681 (An increase of $4,681)

• After 10 years: $218,767 (A decrease of $6,233)

• After 15 years: $182,620 (A decrease of $42,380)

Here, equity starts to decline after 10 years – so we finally see this situation – but only in the most aggressive borrowing scenario.

Putting Interest Rates In Context

To end up with zero home equity in any of these examples, you’d have to almost live longer than any human has in the history of mankind.

In all three examples, your equity increased after 5 years and only when borrowing the full 55% did you see a decline – and even then not for many more years.

Plus, these scenarios assume you pay the higher end of the long-term rate, get average home value growth and that you take all the funds up front, which isn’t always the case.

So, these are closer to the worst case scenarios than the average or best case scenario.

But it’s important to show that – even in the worst case scenario – it’s hard to call reverse mortgages a ‘rip-off’ when it comes to the impact of interest on your home equity.

In Summary – Is A Reverse Mortgage A Rip-Off?

So, is a reverse mortgage a rip-off?

Here’s a summary of everything I discussed in this article:

• Most fees – like the appraisal, legal closing, and ILA – are standard costs, legally required, include important insurance and can’t really be considered unreasonable.

• Lender fees are the only cost that could arguably be called a rip-off – but even those are cheaper than what you’d pay on most other mortgage products (like a private mortgage, second mortgage or B mortgage).

• Reverse mortgage interest rates are among the lowest available for Canadians with limited income.

• Your home equity actually grows in most realistic scenarios and you’d have to almost live longer than any human in the history of the planet to see it fully eroded.  (It’s also worth noting that you can never owe more than your home is worth.)

Taking all of this into consideration, I cannot reasonably say that reverse mortgages are a rip off.

Get A Free Professional Reverse Mortgage Assessment In 90 Seconds

Not sure if a reverse mortgage is right for you?

Looking for the best deal?

Want to see all the hidden costs, fees & interest rates?

I offer a free, quick, no-obligation reverse mortgage assessment.

It takes just 90 seconds, and you’ll get a clear answer on whether a reverse mortgage is a fit for your situation – or whether something else makes more sense – as well as a comparison table of lenders showing all the hidden costs, fees, interest rates and everything.

No sales pitch or anything like that – I give you the information and let you decide.

All it takes is 90 seconds – click here to get started.

Mich Sneddon, CPA, CA

A Canadian Chartered Accountant and licensed Mortgage Professional – creator of Reverse Mortgage Pros – the #1 reverse mortgage specialists in Canada.  I make it my mission to educate Canadians about how reverse mortgages work so that you can make an informed and educated decision that’s right for you and your family.