Top 8 Misconceptions About Reverse Mortgages In Canada

Top 8 Misconceptions

There is little doubt that reverse mortgages are one of the most misunderstood financial products in Canada.

You might be wondering: where does this misunderstanding come from?

Well we already know the answer, it is very simple.  This misunderstanding comes from the U.S.A.

We have talked about this many times before and the fact that there are two products with the same name available in both Canada and the U.S.A. leads to a lot of confusion. We have covered this in great detail in our free reverse mortgage guide (if you haven’t already got a copy of this, get one at https://www.reversemortgagepros.ca/reverse-mortgage/.

Essentially, the 2 products are completely different in many ways.

So today we thought we’d outline what we believe are the top 8 biggest misconceptions that we encounter.

 

The Top 8 Misconceptions

  1. I Will Lose My Home

Easily coming in at number 1, is the idea that you will lose your home.  The ironic thing is that this product was actually designed to let you stay in your home for life – and this is actually more of a disadvantage rather than advantage!

In Canada it is actually written into the legal contract that you cannot lose your home to a reverse mortgage.

Nobody in Canada has ever, ever, ever lost their home because of this product.  It is literally impossible.

 

  1. I Will Lose My Home Equity

The next logical worry is that you will lose all the equity in your home as the interest grows.  This is a legitimate concern – unlike number 1 – but most people are overly concerned like this because they do not understand home value appreciation.

The simple fact is that for a lot of people in Canada their home equity is actually increasing while they hold a reverse mortgage.  This is because home appreciation rates are higher than interest rates and because home appreciation grows 100% of the property – unlike the mortgage which only grows up to 55%.

For more on this, including the latest interest rates, see our article on this – click here.

In addition to this, people fail to appreciate how much interest they pay under a normal mortgage – because it is blended in with the payments, so they don’t really notice it.

Finally, add in the fact that 99% of Canadian homes under a reverse mortgage still had equity remaining in them when the mortgage was discharged and that should ease your concerns regarding this.

 

  1. I Can’t Make Any Payments

Like a normal mortgage, you can repay the balance owed anytime.  If you paid off the whole thing, penalties apply in the first 5 years; however you can also pay off up to 10% every year with no penalty. This is exactly how a traditional mortgage works as well.

In fact, several people choose to make payments of the interest only – effectively turning their reverse mortgage into a Home Equity Line Of Credit (HELOC).  We created a special product name – we call this a ‘RM-HELOC – read more about it here‘.

 

  1. I Already Have A Mortgage – Do I Still Qualify?

Actually, taking out a reverse mortgage to pay off an existing mortgage – and free up your cash – is one of the most popular reasons for our customers taking this product.

Many people use this to free themselves from the burden of their monthly mortgage payment.

It should also be borne in mind that any existing mortgage must be paid off in full and you only get to keep the leftover funds after this. Still, even if there are no leftover funds, then freeing yourself from that pesky monthly mortgage payment could be worth it just by itself.

 

  1. My Family Won’t Like It

Obviously family issues vary from person to person and family to family.  However, we have actually seen reverse mortgages initiated by family members and well supported by them.  In addition to this we have also seen:

  • The money being used to gift family members their inheritance early
  • The money being used to help family members with a down-payment on their home – especially in hot markets like Toronto and Vancouver.

I believe you should absolutely have the conversation with your family members.  Educate them on this product too (feel free to send these articles to them!) – or many of them might believe some of the misconceptions on this page.

 

  1. The Rates Are Too High

First of all, there is no doubt that interest rates are higher than that you can get with a traditional mortgage or a Home Equity Line Of Credit (HELOC).

However, you have to remember that they are completely different products to these – with a much lower risk.  With a traditional mortgage or HELOC you could lose your home if you don’t make payments – that is because you are required to make payments and you are also required to qualify for them.

A reverse mortgage is completely risk free (in terms of losing your home), tax free and you are not required to make any payments.  So of course they are at a higher rate – this is the ‘price’ you pay to get all these benefits.

In addition to this, the interest rate is much lower than some car loans, credit cards, normal loans or a line of credit (unsecured).  All these products are much worse – in terms of the risk to you as well.

 

  1. My Estate Size Is Being Reduced

This is true – but only if you spend the money!  The easiest way to show this is with an example:

Calculation Example

In this example, the person is taking out a $200,000 reverse mortgage.  As you can see, the total estate size is not impacted – as they have not yet spent any of the cash!

In future, the home value will continue to grow and – depending on the home appreciation they get – they could actually still see their estate size grow over time.

 

  1. My Neighbour/Friend/Relative Says They Are Bad!

Finally, the largest misconception usually comes from people around you saying they are ‘bad’ – usually without understanding the product at all.

In addition to this, these people usually believe one of the above statements and do not understand the trade off between home value appreciation and interest that is vital to understand before making your decision on this (see number 2 above).

My advice would be to do your research, learn the real facts and then make an informed and educated decision about if they are the right solution for you.

 

Top 8 Misconceptions In Summary

There are many incorrect and ignorant beliefs about this kind of home loan.  In this article we addressed the top 8.

Do you have any questions or concerns not addressed in this article?  Leave a comment below and we will answer them for you.

 

Comments 17

  • THANK YOU,NOW .I have two GM auto loans with no interest ,why are these included in this .and they want this paid by the reverse mortgage people and add interest …why is this ? They dont seem to tell me all the info I need .The problem is I dont know all the questions. What would be the best reverse mortgage people to deal with? I am a little nervous about this decision ? tks Bryan

    • Hi Bryan

      You don’t have to pay the auto loans unless they were somehow secured against your property? We can look into this for you if you like.

      Thanks,
      Mich

  • What about Insurance terms and conditions,also maintenance standards, RE tax considerations, second mtges. These are never mention in the “smiling” ads. As I understand it a mortgagor can lose his home… full disclosure is questionable!

    • Hi R. Trundle

      The reverse mortgage amount you receive is tax free, however you are still responsible for the property taxes, homeowners insurance and maintaining the property in good standing.

      Any existing mortgage on the property would need to be paid first, out of the reverse mortgage funds.

      As long as the mortgagor is living in the home, they can never be forced out!

      Thanks,
      Gavin

  • What rate of interest is put on the money received through a Reverse Mortgage? Pls give me an example of interest charged per month, per year on a R.M. of $ 200,000.

    • Hi Lawrence

      For the latest rates information and the factors to consider with rates, please see our article on this at https://www.reversemortgagepros.ca/rates-and-penalties/.

      The interest would be roughly $875 per month – which would mean that your home (assuming it was worth $500,000, for example) would only have to grow at 2.1% to offset this interest and for you to not lose any equity. Obviously you don’t have to pay the interest, but you can choose to do so if you like (it is optional).

      Hope this makes sense.

      Thanks,
      Mich

  • hi, I have been reading your info and downloaded the book and have your links all over my computer, is there some way I can email all this separate info and the questions and answers into one place to process. I find I am linking back and forth too much. thank you

  • For example if I take $200,000 with $750 monthly interest and I have the loan for 20 years before I pass on. The total compounded interest in 20 years will be more than $200,000 , making my final payment $400,000 when I pass on.
    The question is if the value of my house then worths only $350,000, what happen to the balance?

    • Hi Joshua

      A reverse mortgage is a ‘non recourse’ loan. What this means is that the amount they can recover is maxed at the value of your home. In this case, they would only be able to recover $350,000 and the lender would have to take a hit on the remaining balance.

      Note: that this is extremely rare (less than 1% of cases) as your numbers don’t really make sense. For example, to get a $200,000 reverse mortgage your home would have to worth around $400,000. So for it to only be worth $350,000 in 20 years time, it would have to have decreased in value by $50,000 over 20 years. That kind of decrease over such a long period is extremely unlikely to happen – pretty much non existent in Canadian real estate history. Even if your home only grew by 1% over 20 years, it would be worth $488,000 and you’d still have money left over. This is why 99% of home-owners have equity remaining when the reverse mortgage is paid off or discharged.

      Thanks,
      Mich

  • What is the average percentage of equity most people end up getting out of their homes when they do sell, with the reverse mortgage? Obviously, situations vary considerably.

    • Hi Trisha

      Unfortunately I don’t have the data on this but I can try and find out. I do know that 99% have equity remaining, I don’t know what the average equity is.

      I would actually estimate it would be well above 50%, if not closer to 75%+ for 3 reasons:
      (1) Canadian real estate has seen strong growth in the past 10-20 years – enough to offset the reverse mortgage interest.
      (2) Not everyone takes out or qualifies for the full 55%.
      (3) Interest rates on all mortgages have actually been on the lower side in recent years.

      Thanks,
      Mich

  • According to city valuation, my prop is estimated at $480,000 so at 66 yrs of age, what percentage would I qualify for ! Also, as opposed to a reverse mortgage, can I just get a Home Equity LOC of $50,000 and leave my existing mortgage as is ! Lastly, when and if I decide to move and/or sell, can I pay off what I would oweu and turn around and buy another house and get anothernew mortgage !!

    • Hi Annie

      I think you talked to us on our live chat?

      How much you qualify for is not just about age – property type, location and appraised value are what will determine this. To give you a full estimate, we’d have to gather all the information necessary – you can get this through our free online assessment at https://www.reversemortgagepros.ca/apply-now/.

      If you qualified for a Home Equity Line of Credit, then you could get this – you’d need the income and credit score to support this. There is also a product you can get that is a Home Equity Line of Credit with no monthly payments – but it is difficult to qualify for. Get in touch with us for more information.

      Finally, yes if you sell, you can pay off the mortgage with no penalties. Before this penalties apply – this is the same as every other mortgage in Canada. To see the penalties, I have outlined them in detail at https://www.reversemortgagepros.ca/rates-and-penalties/.

      You can use the money from a reverse mortgage to buy another house if you like. In fact, if you used the funds for any kind of rental property (or any other investment) then in doing so then the interest on the reverse mortgage would be tax deductible.

      Thanks,
      Mich

  • Can one get a reverse mortgage on a mobile home.?

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