What’s Hidden In The Small Print With Reverse Mortgages?

There are several items in the ‘small print’ of reverse mortgages worth discussing – that I often get questions about.

These include: maintaining your property, home insurance, paying property taxes and the usage of the home.

I’m not going to look at things around penalties, fees, interest rates and so on – these are more like the ‘large print’ and already covered in detail in other articles:

• Interest rates and penalties – Reverse Mortgage Rates And Penalties
• Costs and fees – Reverse Mortgage Costs And Fees

As usual, you can either read the article in full below, or watch the video version:

 

Before I Get Started – Are You New To Reverse Mortgages?

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Back To The Article: Two Categories To Think About With Regards To The Small Print

The small print is one of the common questions I get asked about (you can see some of the others in this article on frequently asked questions about reverse mortgages).

When it comes to the small print in the reverse mortgage contract can generally be broken down into 2 categories:

1. Things in the contract that the lender will likely be able to enforce.

2. Things the lender wants to encourage you to do but are likely not enforceable practically or legally.

I’ll discuss #2 in more detail as it’s an important thing to consider before we jump into the reverse mortgage details.

 

Unenforceable Contract Clauses Explained

You can include anything you like in a contract – it doesn’t make it enforceable.

There are two reasons why something may be unenforceable:

• Practicality: it’s practically impossible to monitor and prove. That is, the amount of resources to actually monitor and enforce it essentially make it impossible to do (it’s too expensive and time consuming to be worth it).

• Legally: the courts likely won’t even uphold it, even if you could enforce and prove it. That is, even if you could spend all the time, money and energy to monitor and prove something it won’t necessarily be upheld in court.

 

 

A Made Up Example: Pizzas

Let’s say there’s a fictitious mortgage company owner and they really don’t like pizzas.

In fact, they hate pizzas with a passion…

So they put the following clause in the small print of all their mortgage contracts:

“While you have a mortgage from our company on your home you are not allowed to make or eat pizza in your home.”

What would this mean for you getting a mortgage with them?

 

The Unenforceable Pizza Clause Explained

This pizza clause is an example of something that is both practically and legally unenforceable in a mortgage contract.

It is included to discourage you to make or eat pizza – since the lender wants to discourage this behaviour due to their hatred of pizza.

But it would run into issues being enforced for 2 reasons:

1. Trying To Enforce This Clause Would Be Practically Impossible

Firstly, you’d need teams of ‘pizza inspectors’ going around and inspecting people to see if they were making pizza. This would take a lot time, money and effort.

On top of this, you’d have to let these pizza inspectors into your home (which you are legally able to refuse).

So they may not be able to get into the home to get the proof they need anyway.

And what about calzones? Are they a pizza? What about toasted bread with sauce and toppings on top of it?

Then there’s the legal side.

2. It’s Unlikely That The Courts Would Uphold It Legally

If they could prove you made or ate pizza in your home, they’d have to have a court rule on a foreclosure/power of sale based on this – which is incredibly unlikely.

In Canada you have (under the constitution) “the right of the individual to the use and enjoyment of property”.

Property rights in Canada protect you from having your property taken away from you without a good reason.

And just because something is in a contract, doesn’t make it legal or something that the courts will hold up – especially when it comes to taking people’s homes away.

Taking someone’s home away from them is not something the courts do lightly and the lender would need a very good reason to get this – the pizza clause is unlikely to be a good enough one!

Ok with this fun example over, let’s go back to reverse mortgages…

 

Small Print Items – Which Are (Likely) Enforceable & Which Are (Likely) Unenforceable

 

Warning: I Am Not A Lawyer!
This Is Not Legal Advice

Before I get into the weeds on reverse mortgages, the below information is provided as my opinion only as someone with expertise and experience in reverse mortgages. You should confirm with a lawyer any parts that you’re worried about.

In Canada, you’re legally required to get independent legal advice before signing a reverse mortgage – so this article and these topics would make a good list to talk to them about.

Especially, if you want to talk to your lawyer about pizza contracts…

Pizza aside, here’s a list of topics in the small print of reverse mortgages with my views on them that might help you if this is something you’re concerned or worried about.

 

Property Tax Payments

This one is pretty straight forward.

It’s included in some contracts that you keep your property tax up to date (which does include using deferred programs in some Provinces – which are fine to use – see my article on taxes, Government benefits and reverse mortgages for more on this).

This is something that doesn’t need a second thought: if you don’t keep your property tax in good order, you’ll risk losing your home.

In reality, this has nothing to do with a reverse mortgage and what’s in the reverse mortgage contract – if you don’t pay your property taxes you’ll risk losing your home if you have no mortgages, 100 mortgages, 10,000 mortgages, a private mortgage, a Home Equity Line of Credit, love making pizzas in your home or a reverse mortgage – it doesn’t matter.

Simply put, you need to always make sure your property taxes are in good order – whether you take out a reverse mortgage or not.

 

Home Insurance

Before you take out a reverse mortgage, you’ll be required to provide proof of home insurance.

This is something that pretty much every lender of every mortgage in Canada requires. I personally haven’t been involved in a single mortgage (ever) that hasn’t required home insurance – it’s a standard policy in almost all mortgages.

The reason is that your home is collateral for the (large) loan a mortgage lender is giving you – so they want you to insure it to protect this collateral.

If you don’t provide proof of home insurance, they simply won’t lend you the money – again, this applies to almost every lender of every mortgage type in Canada.

But what about after you have the money, could you cancel the insurance?

It would be very hard for a lender to find out if you cancelled and didn’t maintain home insurance. If they did find out, would a court uphold this?

I don’t know of any legal cases involving this or any cases of this being an issue at all.

The reason is that the first thing the lender would have to do is give you the chance to rectify the situation.

So, the lender would have to give you an opportunity to fix the issue by buying home insurance – which is why there aren’t really any legal cases on this.

If you were faced with the decision of paying a few hundred bucks on home insurance or thousands of dollars in legal fees (and potentially losing your home), which would you choose?

However, it’s worth noting that if you didn’t have insurance and something happened, you’d be financially hit twice: firstly, you’d be personally liable for the mortgage and repaying the entire mortgage balance still. Then you’d also have to pay the costs to rebuild or fix your home too.

So, I strongly recommend maintaining home insurance, regardless of what a reverse mortgage contract says (or if you don’t even have a mortgage).

 

Property Maintenance

Almost all reverse mortgage lenders include some kind of clause requiring that you ‘maintain’ the property.

In my opinion, this is very similar to the made-up pizza clause I talked about – it is unenforceable for 2 reasons:

• It’s practically impossible to prove – you’d have to hire teams of property inspectors and hope that people let them into their homes. In addition to this, one person’s definition of ‘maintaining’ a property is different to another.
• It’s also highly unlikely – if they could prove it – that a court would agree and uphold this as a reason for a foreclosure or power of sale. You’re entitled to free right to ownership of your property in Canada.

I don’t know of a single case where a person has lost their home or had an issue due to it not being maintained with a reverse mortgage.

However, that said, I highly recommend that you keep up maintenance on your property anyway.

It’s something that has a high ROI (return on your investment) by maintaining the value of your home (one of your largest assets). Every dollar you put in, while you don’t see the return for a while, maintains not just the home itself but the value of your home too.

At the end of the day, you’re still going to have a lot of equity in your home – and you will always be the home owner (not the lender) – so it’s your money on the line too.

A good rule of thumb is budgeting 0.5% of the value of the home in annual maintenance costs – things like gutter cleaning, water proofing, furnace servicing and so on. You can include home insurance in this budget too.

This is similar to what people who own Condos and Townhouses pay in maintenance fees – just you’re doing it for your home.

 

Usage Of The Home

Almost all the lenders are fine with renting out a portion of your home and you do not need to report this. For example, you can rent out the basement to a tenant.

However, if your home was no longer your principal residence this would be something you should report and that could cause an issue.

Again, this is the same as with all mortgages across Canada – all lenders designate homes as ‘principal residences’ or ‘investment properties’ and issue different mortgage contracts accordingly.

Principal residences generally have better rates and terms than investment properties. This is because investment properties are deemed much higher risk than a principal residence – so all lenders in Canada care a lot about what you’re using the home for.

It’s worth noting that you technically don’t need to live in the home permanently (all year round) for it to be designated a principal residence.

Cottages, for example, can still be designated a principal residence in some situations. The ‘snow birds’ who live in the home for only a portion of the year are fine.

And if you only own one property, you don’t need to really worry about anyone ever asking if it’s your principal residence or not.

Where you have an issue is fully renting out the entire home (so it’s definitely not your principal residence). This includes using services like AirBnB for short-term rentals.

Lenders do not like AirBnB and in fact most of them will not lend a reverse mortgage if your home is on there at the time you apply.

Because AirBnB listings are public, it’s easy to find out if you use it. Remember how the first part of something being unenforceable is how it’s practically hard for them to find out? This is not the case with AirBnB as they can find them easily. Whether or not the lenders have teams doing this is a different question…

This has not been tested in court (that I know of) so there’s still a chance the court would side with you and consider AirBnB your free right to use your property.

This is probably one to discuss with your lawyer, if you plan on doing it. Or you can take the safer route and avoid it.

 

Categorizing The Small Print

So those are a lot of the items in the small print of reverse mortgages that people often get concerned about.

Here’s a quick summary of how I’d categorize them:

Likely Enforceable

These are items that you should maintain and could lead to issues with your reverse mortgage.

• Home insurance

• Principal residence

• Property tax

 

Likely Unenforceable

These are items that – in my opinion – likely can’t be enforced by the lender either legally or practically.

Think of these as like the pizza clause!

However, they would definitely be worth discussing with your lawyer.

• Maintaining the home (however, I do recommend you do this anyway due to how high a ROI it is)

• Other (partial) usages of the home – such as short term rentals

All of the above would make a good checklist to print out and discuss at your independent legal advice.

 

In Summary – The Hidden Small Print In Reverse Mortgages

The key small print items to ensure you cover yourself for a reverse mortgage are: home insurance, property tax and principal residence requirements.

The other small print items – such as maintaining the home and rules around how you use it for short term rentals – are not likely to be enforced and largely included to encourage (or discourage) this behavior. I would not be so worried about them.

However, when you get your (required) legal advice before taking out a reverse mortgage, make sure and discuss these with your lawyer.

 

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