In  this article we thought we would outline the real pros and cons of a reverse mortgage.

Like any financial decision, there are both advantages and disadvantages that need to be considered.

As the leading specialists in Canada, we believe in objectively showing you both the advantages and the disadvantages of a reverse mortgage – so you can rest assured that the decision is absolutely the best one for you.

You want to make your decision while being informed and educated about all the facts.

So in this latest article, we’d like to take a look at both the major pros and the cons of a reverse mortgage in Canada.

But What Exactly Is A CHIP Reverse Mortgage?

If this is your first time reading about this kind of mortgage, I strongly suggest you
click here to learn more
if you have not already downloaded our free guidebook – in that you’ll learn everything you need to know about reverse mortgages in Canada.

Pros And Cons Of A Reverse Mortgage

PROS:

1. You Own Your Home For Life.  Period.  No Exceptions.

By far the biggest advantage of this mortgage product is that it allows you to get money out of your home with absolutely zero risk that you’ll ever lose ownership of your home.

This product – unlike what some people believe – is designed to keep you in your home for life.
Unlike a ‘normal’ mortgage, home equity loan or a home equity line of credit – you are guaranteed to keep ownership of your home for life and the lender cannot take it away for any reason whatsoever.  This is actually written into the legal agreement in black and white. 
This is because no repayments are required – failing to make repayments is the major reason that mortgage or home equity lenders risk losing their home.

 

2.  Freedom And Flexibility

Increasingly in Canada, the majority of savings one has upon retirement are tied up in property.
With property prices being so high, this type of mortgage allows you to take advantage of this and get some of the equity back out of your home.
The money you take out can be spent on anything you like – you have the complete freedom and flexibility to decide.  You’ve worked hard your entire life – now is the time to reap the benefits, live worry-free and free of debts or stress.
You don’t have to make any payments (although you can voluntarily make some if you like!) and there are no rules or requirements on how you spend the money.  This is as it should be – you invested into your home over the years and you should now reap the benefits – turning it into a ‘home pension’ by taking out a reverse mortgage is one way to do this.

 

3.  100% Tax Free

The money you receive – regardless of how you choose to receive it – is tax-free since it is technically a loan and not income.
Unlike pension withdrawals or other forms of retirement funds, it is not taxed at all.  Not one penny.

 

4.  No Re-Payments Required

The whole purpose of this loan is financial freedom – not loading you with more debts that you need to worry about paying!

 

Through conservative lending and not lending over a certain value of your home (55% maximum), it is possible to maintain the equity in your home without requiring you to make any repayments – home valuation growth can offset the loss of equity instead.

 

5.  Safety If The Housing Market Declines

Even if there was a massive housing crash, you will never owe more than what your house is worth at sale – guaranteed. Even when things such as Brexit occur, we are there to help you.

 

This is written into the contract.  So you are protected against any future potential housing shocks.  You don’t need to worry about what’s going to happen with the housing market in Canada.
And, best of all, 99% of reverse mortgages in Canada have equity remaining when the mortgage is removed.  The other 1% is capped to what the home is worth – it can never be above this.
So you also don’t need to worry about leaving a bill behind for your family.

 

 Cons Of A Reverse Mortgage

DISADVANTAGES OF A REVERSE MORTGAGE:

1.  Interest Rates

The amount you receive is still liable to interest.  Although you will never have to make any re-payments, this could reduce the equity in your home over time – but only if interest rates are more than double your property value appreciation.

Interest rates are almost always higher than a ‘normal’ mortgage or Home Equity Line Of Credit (HELOC) but lower than a Line Of Credit (unsecured), Car Loan, Loan or Credit Card rate by quite a bit.
The rates are low enough that growth in your home price should offset the interest – or in many cases just now, you can actually still see your home equity grow – even with a reverse mortgage on your home.
However, you need to factor this in and decide if the rate is worth paying for all the features and benefits (listed above).  For more on this, see our article on interest rates and penalties:

 

2.  Moving Home Is Harder

The whole purpose of this product is to help you stay in your home.

 

So if you were thinking about maybe moving to another residence in future, it’s a little more difficult as you’d have to close out the mortgage first.
Of course you can just pay off the mortgage with the proceeds from the sale of your home (as we noted above, you can never owe more than what your home is worth at sale).  However, it does add a little more complexity to the decision to move home.
It should be noted that the same applies to any type of mortgage or loan secured on your home.  A ‘normal’ mortgage or Home Equity Line Of Credit would have the exact same disadvantage.

 

3. You Might Not Be Eligible

While you do not need good income or an excellent credit score – which you would need for most mortgage products, there are some restrictions on eligibility.

All property owners listed on title must be over 55 and your age(s) will determine how much money you are eligible for – in general, the closer you are to 55 the less you are eligible for.
This is because of how conservative the lending is.  If they were not as conservative, people would see their home equity being eaten up – so these rules are put in place to protect you and your home equity.
Furthermore, this product is only available on your primary residence – not any vacation or mobile homes.

 

4. Reduction Of Your Estate Size For Inheritance

Of course one of the disadvantages of a reverse mortgage (depending on your outlook) is that you are reducing the estate size available to your relatives for inheritance.  For this reason, you might consider speaking to any relatives or family members during the process of applying to ensure they are happy with everything.

The other thing to note is that you are only reducing your estate size if you actually use the all the money.
Of course, if you don’t actually use the money then your estate size stays the same – you have just moved some of the value of your estate out of your home and into your bank account – it is still in your estate just in a different format.
The actual impact on your estate size will then depend on how much of the money you use and the growth in your home prices vs the interest rate.  Some people (many people in Canada just now) are actually seeing their estate size increasing despite having a reverse mortgage on their property – this is because home price appreciation is offsetting both the interest rate and money being spent.
It would definitely not be prudent to rely on this happening though and factor in a reduction in estate size to your decision.

 

In Summary

I hope the article above helps you decide if this is a great fit for you.

 

Sometimes you will have heard other rumours or ‘facts’ about the disadvantages of a reverse mortgage in Canada – mainly this is people confusing them with the American version of the product.

 

If you want more information, feel free to leave a comment below.

The above information represents the real and true pros and cons of a reverse mortgage – if you have any other questions or concerns then feel free to leave a comment below and we’ll respond in due course.


Mich

The #1 reverse mortgage specialists in Canada.

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Claudette Linchet

Please send info to the about e-mail. Thank youClaudette Linchet

Al Stacey

What maintenance and upkeep and taxes is the home owner responsible for? Al Stacey

zaine

i have a secured line of credit i was told i would have to get rid of it on the the title before i could even think of applying im not to kean on that idea.

Gregg

Basically you are going to receive lets say, our $500,000 house and your only going to pay $200,000 or less. You are not nearly telling people the worst things that can happen! Interest rates have to be renegotiated every 5 years or less. You charge much higher rates than a normal mortgage. If they spike they will lose their whole equity in a very short time. You need to publish some examples of what can happen.

thank you for your info can you send me a telephone number so we can reach you

Gerry Taylor

Is there a penalty for trying to discharge the “loan” before 5 years?

Mary Louise Emerson

Why do the banks not deal with reverse mortgages ?
How is a regular mortgage discharged from a bank to receive a reverse mortgage?

J Borges

Is it permitted to rent out your home while holding a reverse mortgage?

Irene McFetridge

Please email me a reverse mortgage calculator when available. Thank you.

Roy Sawchuk

I have $100,000 remaining on my mortgage. Do I qualify for a reverse mortgage and if so, must I use the funds obtained from the reverse mortgage to pay off the existing mortgage?

Nancy

Can a reverse mortgage be in both owners names, so when one person passes, the other can still stay in the house?
Once the owner passes, when does the property have to go on the market?

Jeanette

I have a relative who wants to do a reverse mortgage with his apartment, which he owns, but he is over $200,000 in debt on a line of credit….would this be a wise choice?

jeff

my property worth around 850000 and I have a mortgage of around 229000 and home equity loan of around 110000,i am 64 years old how much cash would I get from reverse mortgage?

Linda Lee

What happens if the amount of equity you have goes above the amount qualified for because of interest , let’s say we are on a fixed income and no longer qualify to get that amount as a mortgage?

Darlene

Do you do reverse mortgages on mobile homes

Wally

I’m trying to make sense of this. Say I owe 360k on my mortgage and my house can sell for 1.1M that leaves me with 740k equity. 55% of that would qualify me for 407k if I meet all requirements for full amount. If I pay off my mortgage, I’m left with 47k. Do I start paying the higher interest rates from this type of mortgage immediately on the 360K I used to pay off my mortgage?

dan

i would be most interested in receiving a reverse mortgage calculator.
It appears the key issue is the interest rate difference between a reverse & traditional mortgage ?
thanks

Ruth Martin

Do I have to pay off a current regular mortgage I have wiith a CHIP mortgage?

Guy

I have a reverse Mortgage and I was just mailed my 2017 annual statement which has a line stating that my Maximum Interest Deductible for 2017 is $2842.13. Can I claim this amount as a deduction for my 2017 Return?

Barb

Is there a lender or broker fee involved? I understand there are appraisal fees, legal fees and title insurance.

If the home owner passes away, is there a time limit that the reverse mortgage needs to be paid out by or will the bank wait for probate and the sale of the home?

Barb

Mich! It is important to know if the lender charges a fee as these can be quite substantial. As there is only one lender who deals in reverse mortgages in Ontario, this should be an easy question to answer. “May” is not good enough!

Barb

Mich! Your costs sheet states the legal, admin and set up fee is $1750. I contacted Home Equity bank CHIP program directly and they advise that the one time admin fee is $1795 and legals are extra. They also said any lender and broker fees would be paid at their end. You can see why I am confused! I’m not interested in hidden fees!

Rick

If owner ended up in a long term care facilities would they have to sell there house or could they keep it in hope of going back home some day ??

Barry Campbell

A reverse mortgage is approved for 2 people on a joint (husband and wife) owned property and after several years one spouse moves out of the residence and move to a different residence. The other spouse (who remains in the residence) does not want to leave the residence. Can the spouse who remains be forced to leave or sell agree the residence as the spouse who has left wants their 1/2 share of the sale of the residence after the residence is sold and the reverse mortgage is paid off?

Louise

Can you pay the interest on a monthly basis if your approved

Marianne

I had my home appraised by a certified appraiser – do I have to do this again ??

Jennifer Lehman

If one has a reverse mortgage in place, can they still use the deferral program for payment of house taxes, or does this break the contract?

Dave

when owner(s) pass away, what happens to the sale of the home. if the home owner borrowed 100,000 at the time of their death the home sold for 300,000 what portion goes to the reverse mortgage and what portion goes to the estate?

Vee

Hi how soon after I purchase a home do I have to wait before I can apply for a reverse mortgage ? ..example…. I purchase a home for $400,000 and mortgage for $100,000. when can I apply for reverse mortgage for the outstanding amount ?

George Gill

hi I would like to find out approx. amount we qualify for on a reversemortgage

Mario

Could I still rent my basement suit

Samantha

I don’t see a calculator on your site that would provide a clear indication of the costs throughout the life of the reverse mortgage so that I could calculate accumulated costs . I’m curious whether the interest charged compounds monthly? Semi-Annually or ?? If you can provide this, I’ll develop a spreadsheet which would also consider exit penalties at various stages. Thanks

How much interest do you currently charge on reverse mortgages?

Jan

Do you pay interest in the accrued interest? I.e. initial loan is $100,000 and total interest for the first year is $5,000, is the interest for the following year calculated on $105,000, second year on $110,000 and so in? Or is the interest always just calculated on the initial $100,000. Also when renewed would the loan amount become $125,000 (total of $100,000 plus 5 years of interest?

Joe Stenta

Do both my wife and I have to be over 55, or just myself to quality?

Katie

Hi Mich ..hope your day is well ..you have mentioned that property taxes and insurance is still home owners responsibility , but also I read here that we can also defer our house taxes . sooo can I defer my taxes while being “in” a reversed mortgage . Thanks for your input .

Gordon Atherley

Hello Mich

My wife and I have a reverse mortgage. As an experienced researcher, I would like to speak with you by phone, please, because I am seeing problems of security.

Thank you.