Reverse Mortgages In Canada – What’s The Catch??

Many people think a reverse mortgage sounds too good to be true and wonder, “What’s the catch?”

Others mistakenly believe the lender will take their home or all of their equity.

In this post, I’ll address these concerns, explain the real catch behind reverse mortgages, and reveal how lenders actually make money from them.

As always, you can read the written article below or watch the video version:

What Is a Reverse Mortgage?

A reverse mortgage is available to homeowners aged 55 and over.

It allows you to borrow money without requiring monthly payments.

You can access up to 55% of your home’s value – typically between 10% and 55% depending on factors like your age, property type, and location.

However, any existing mortgage on your home must first be paid off using the reverse mortgage funds.

This product is designed to help retirees tap into their home equity while continuing to live in their homes.

It’s a financial tool that can provide significant flexibility during retirement.

The best place to get started learning more is my free reverse mortgage guide.    

Common Concerns and Questions About Reverse Mortgages

When considering a reverse mortgage, people often ask:

• Why does it seem too good to be true?
• Will I run out of equity in my home?
• What could go wrong?
• What’s in it for the lender?

Let’s tackle these questions one by one.    

Why Do Reverse Mortgages Seem Too Good to Be True?

It’s easy to feel skeptical.

After all, it can seem like you’re being given money for free without having to pay it back (which isn’t the case).

In addition to this, the sums of money involved can be quite large – tens to hundreds to millions of dollars.

And the process is relatively simple – a few forms, a straightforward approval process, and you could receive a large amount of money.

Even more surprising is that the lender is paying you instead of you paying them, hence the “reverse” name…

In Reality…

Reverse mortgages are a well-established financial product worldwide and just another type of mortgage (and they’ve actually been around for over 400 years).

While it’s true that you won’t need to make monthly payments, the lender will eventually be paid back, often many years later (although it might not be you paying them back).

When the reverse mortgage is settled, whether by selling the home or through other means, the lender then earns a return on their investment.

Ultimately, reverse mortgages often represent a “win-win” situation: lenders earn a solid return, and homeowners gain access to much-needed cash.    

What’s In It for the Lender?

Lenders offer reverse mortgages because they provide a reliable return on investment.

Interest rates are generally about 2% higher than those for traditional mortgages.

While the lender’s money might be tied up for years, they will eventually recoup it – along with interest.

Should you decide to pay it off earlier then – like almost every mortgage in Canada – early prepayments will apply – this is something covered in this article: Reverse Mortgage Penalties.

Aside from penalties, then from the lender’s perspective, a reverse mortgage functions similarly to a long-term bond, offering steady interest but at a higher rate – except they don’t receive the interest for a long-time (rather than multiple times a year).

It’s a relatively low-risk financial product for lenders, which makes it a viable offering.    

But Won’t You Lose Your Home or All Your Equity?

A common myth about reverse mortgages is that lenders can take your home.

This is not true.

The lender does not want your home; they are in this for investment purposes, not to acquire properties.

Additionally, fears of losing all your equity are largely unfounded.

In fact, 99% of Canadians with reverse mortgages still have equity remaining when the loan is repaid.

The idea is that your equity grows over time as the property value appreciates, which helps offset the accumulating loan balance.

The easiest way to see the impact on your home equity and the reverse mortgage balance over 5, 10 or even 20 years is to use my free reverse mortgage calculator.    

The Real Catch With a Reverse Mortgage

The real catch is that reverse mortgages are designed to be a “win-win” solution.

It’s in both your best interest and the lender’s best interest that you don’t lose all your home equity.

You can never owe more than your home is worth, even if the loan balance surpasses the property’s value.

Should that ever happen (the amount owed exceed the home value) then the lender absorbs the loss – and the last thing a bank or lender wants is to take a loss on a mortgage!    

Protecting Home Equity

Lenders carefully manage risk by only lending 10% to 55% of your home’s equity, based on factors like your age, location, and property value.

(For more on this, see this article: Qualifying For A Reverse Mortgage – How Much Can I Get?)

They perform detailed calculations to ensure you don’t exhaust your equity over time.

If lenders didn’t care about protecting equity, they might lend at much higher percentages – 60%, 70%, or even 90%.

The reason that they don’t lend more than 55% – and typically in the 10% to 55% range – is because they don’t want your home equity to get used up.    

In Summary – What’s The Catch With Reverse Mortgages In Canada?

Reverse mortgages may seem too good to be true because they allow you to unlock cash from your home without immediate repayment.

However, they are a carefully designed financial product that works as a “win-win” solution for both homeowners and lenders.

By tapping into your home equity, you gain financial flexibility during retirement, while lenders earn a steady return on their investment.

Ultimately, the structure of reverse mortgages ensures that it’s in everyone’s best interest to protect your equity.    

Free Professional Reverse Mortgage Assessment

If you’re considering a reverse mortgage and would like a free assessment – by a Chartered Accountant and the #1 Reverse Mortgage Broker in Canada – to find you the best deal and advise if this is the right solution for you, you can do so here:

Get A Free Professional Reverse Mortgage Assessment

This service is completely free and there are no pushy sales pitches – I simply provide the information for you and let you decide if it’s something you want to pursue.

Mich Sneddon, CPA, CA

A Canadian Chartered Accountant and licensed Mortgage Professional – creator of Reverse Mortgage Pros – the #1 reverse mortgage specialists in Canada.  I make it my mission to educate Canadians about how reverse mortgages work so that you can make an informed and educated decision that’s right for you and your family.