Pros And Cons Of A Reverse Mortgage

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 reverse mortgage Canada specialists – 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.

Pros 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

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 – The Pros And Cons Of A Reverse Mortgage

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, don’t forget to download a copy of our free guide to reverse mortgages in Canada.

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.

Comments 23

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

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

    • Hi Al

      Maintenance and upkeep is solely up to you as the home owner – there are no rules with regards to this.

      However, you are still responsible for property taxes and also keeping up any home insurance.

      Hope this helps.
      Thanks,
      Mich @ Reverse Mortgage Pros

  • 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.

    • Hi Zaine

      That information is correct, but you can use the reverse mortgage funds to pay it off. For example, let’s say you qualify for a reverse mortgage of $50,000 and your secured loan is $10,000. You would pay the $10,000 off first then keep the remaining $40,000.

      Thanks,
      Mich @ Reverse Mortgage Pros.

  • 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.

    • Hi Gregg

      Thanks for your comment. I would say that it’s impossible to address all aspects of this product in one article, without making it over 10,000 words and way too long! What you are talking about (interest rates being charged and the impact on equity) I address in the following article (including giving examples): https://www.reversemortgagepros.ca/reverse-mortgage/reverse-mortgage-rates-penalties/.

      If you are worried about rates spiking, you can fix your rate. And yes, you do have to reconsider the rate every 5 years – but this is the same with almost any mortgage product or any product tied to a home loan. The vast majority of Canadians take out 5 year, fixed rate mortgages – this is the same as what is offered with a reverse mortgage.

      Finally, I would suggest you read my other article and consider the balance of home equity vs interest rates – when considering what can happen. Most people do not consider the balancing impact of house price increases. If you don’t believe me, here are the official statistics: 99% of seniors in Canada with a reverse mortgage on the property had equity remaining on that property when the reverse mortgage was discharged. That’s 99% over a 30 year+ time period. In addition to this, 50% of them had more than 50% equity remaining.

      I hope this helps – I am probably going to publish a ‘reverse mortgage calculator’ so you can see for yourself what happens to your home equity under a reverse mortgage – if you shoot an email to me, I can email you an Excel copy.

      Thanks,
      Mich @ Reverse Mortgage Pros

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

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

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

    • Hi Mary

      Good question – I would assume you mean the ‘Big 5 Banks’ (RBC, CIBC, BMO, Scotiabank or TD) – HomEquity Bank who provide the reverse mortgage are actually a Schedule A bank themselves! Unfortunately I don’t know the answer but I would guess (just my personal view) that the reason they do not deal with reverse mortgages is that it is a very specialist product. So it would require extensive education of their employees and bringing in some additional resources to support it. On top of this, the upfront costs are high and you potentially won’t see any of your money for a while (since there are no monthly payments, like a traditional mortgage) – so for these reasons they have decided not to offer them.

      A regular mortgage is discharged in the same way it would be if you were to change your mortgage provider to any other lender. You would inform them that you intend to discharge the mortgage, you may have to pay any costs or fees (this depends on the lender) and the legal charge would be removed from title. The lawyer handling the reverse mortgage would take care of all of this – it is included in the costs and fees of a reverse mortgage that I outlined here: https://www.reversemortgagepros.ca/reverse-mortgage/reverse-mortgage-costs-fees/

      Thanks,
      Mich @ Reverse Mortgage Proes

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

    • Hi There

      Firstly, the residence must be your principal residence. There is no getting around that. You could not rent it out and live somewhere else. This is the same for all mortgages, which usually have a clause in them requiring it to be your principal residence – as there are different rates for mortgages that are not a principal residence.

      However, if you lived there for 6 months and were ‘snow birds’ the other 6 months (renting it out) I do not see a problem with this – as it is still technically your principal residence.

      Another example would be that if you owned a cottage you can designate it to or your home to be your principal residence. However, you couldn’t designate one to be your principal residence and then rent that place out!

      What I would suggest doing is disclosing this and being upfront in your application, so as not to create an issues down the line.

      Hope this helps.
      Thanks,
      Mich @ Reverse Mortgage Pros

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

  • 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?

  • 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?

    • Hi Nancy

      Not only can a reverse mortgage be in both owners names, but it must be in both owners names for this exact reason. In the U.S. this would happen a lot – the owner passes away leaving the remaining person to sell – but in Canada this rule was created to stop this happening.

      So, a reverse mortgage must be in both owners names (meaning both must qualify for it – be over 55) and when one passes away the other can still live in the home for the rest of their life as well – with absolutely no change to the reverse mortgage at all.

      Hope this helps.

      Thanks,
      Mich @ Reverse Mortgage Pros

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