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
- 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.
- 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.
- 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‘.
- 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.
- 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.
- 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.
- 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:
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.
- 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.