The information you need to know before you commit.

For which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it. Luke 14:28-30 NKJ Version

Since Biblical times the construction of a commercial or residential building has involved financing… private and institutional. Traditionally homeowners have used a line of credit to supplement retirement incomes.

Most recently, the dawn of a new larger demographic, aging baby boomers, with longer life expectancies and finding themselves cash poor but house rich, were looking for additional cash while staying in their homes. This led to the development of the Reverse Mortgage… first in the United States followed by Canada.

Advertised by familiar entertainment personality spokespersons, Reverse Mortgages first became popular in 1986, around the time the “Freedom 55” ad campaign began.

In Canada, however, reverse mortgages work very differently than in the United States. This article is not written as an advertisement for reverse mortgages, but rather to inform readers over 55 of the pros and cons of this option..

Trust in the Lord with all your heart and lean not on your own understanding. In all your ways acknowledge Him, And He shall direct your paths.

Fortunately for Believers we do not have to muddle through all the possibilities on our own. We can shop for this, perhaps our biggest senior lifetime purchase, prayerfully and with knowledgeable advice.

Athena Constantinou, Chief Operating Officer & Co-Founder of Sherwood Mortgage Group, Toronto, advises a remortgage should be treated like any other large purchase and all options should be carefully shopped for before making a final decision. Start shopping around a few months before the end of your term. Contact various lenders and mortgage brokers to check if they offer mortgage options that better suit your needs. Don’t wait until you receive the renewal letter from your lender. And do not be shy to negotiate a better interest rate.

Much of the information I am presenting was provided by Sherwood Mortgage Group or was pulled from “The Ultimate Reverse Mortgage Guide” written by Michael (Mich) Sneddon, an independent, licensed Mortgage Agent and Chartered Accountant with Dominion Lending Centres. Sneddon offers free independent and impartial advise

The Government of Canada also offers excellent information on the subject including the booklet; “Understanding Reverse Mortgages”. (Click HERE to download a free copy.)

Homeowners who have built up their equity through the years and are now approaching retirement or already retired can access their home equity to help with insufficient funds to make their day-to-day costs, travel plans, accessibility or home renovations, medical bills or to help family members or whatever, without month-to-month payments of a typical loan. 'Instead of making monthly payments, the interest is simply added to the balance owed'

There are no conditions or requirements as to how the money is spent. In Canada most reverse mortgages are used to pay off existing mortgages to free up cash and to supplement pension during retirement years.

In addition to owning a house, there are the eligibility requirements. The homeowner and anyone on the title to the home, including the spouse, must be 55 or over. The reverse mortgage is for a home that is the principal residence. Any existing mortgages or loans secured against the home must be paid off using the reverse mortgage funds, but there are also programs that can ‘top this up’ if required). Whatever is leftover can be kept. How much the homeowner qualifies for is dependent upon four key factors: age, the home location, the property type and the home valuation. As a rule, reverse mortgages are not issued for more than 55 per cent of the home value, with most being paid “up to” 55 per cent.

Sneddon shares a key secret to keeping home equity. Most reservations homeowners have with reverse mortgages is interest rates and losing their home equity. However, if the homeowner takes out a reverse mortgage for half the home, the home equity would have to grow at only half the interest rate of the reverse mortgage not to lose any lose any equity.

The amount of money the homeowner owes can never be more than what the home is worth. This is an important safeguard on a Canadian reverse mortgage, as this gave them a bad name in the United States. This way the 99 per cent of homeowners in Canada who have taken out a reverse mortgage still have equity. Almost anyone who took out a reverse mortgage has seen their home equity continue to grow. Also, in the US reverse mortgages are available to those under 55 on title - which meant that if the older homeowner passed away the remaining homeowner was forced to sell the home. This doesn't happen in Canada - if one homeowner passes away, the other simply takes over the home and reverse mortgage.

There are benefits and negatives to taking out a reverse mortgage. Reputable mortgage brokers who work with reverse mortgages generally offer free assessments within a short time. You can get the money whenever you need it, if you qualify. Reverse mortgage cash is 100 per cent tax free. Homeowners can spend the money however they wish and can stay in their homes forever without exceptions.

No payments are required at all, unless or until the homeowner chooses to move or sell.

There are however disadvantages of using a reverse mortgage. Moving out of your home is more difficult. While many homeowners think that they will “lose their home” the opposite is true. The homeowner must discharge a mortgage as part of that process. Reverse mortgages, the same as a HELOC, a Home Equity Line of Credit or a normal mortgage, make the discharging more difficult. While there are no repayments, a reverse mortgage is still a mortgage loan subject to interest.

While home equity growth can offset this interest. reverse mortgage rates tend to be above that of a Home Equity Line of Credit or the top mortgage rates available today.

A reverse mortgage reduces the size of your estate and thus the inheritance that the homeowner will leave their family. Assuming the homeowner kept all the cash for a reverse mortgage and didn’t spend it all, there could be no reduction in the estate.

Ninety-nine per cent of Canadians who take out a reverse mortgage still have equity when they sell their home. So, it is very unlikely a homeowner would be reducing their estate to $0.

The estate and the home is the homeowners to do with whatever they wish. However, they might want to have a discussion with their family and anyone who might be impacted before making this decision.

A Home Equity Line of Credit (HELOC) ) is a loan that is registered against the home. That means that there is a risk of losing the home with a HELOC if payments cannot be made. In addition, a HELOC is a traditional loan that requires monthly payments of at least the interest due, where a reverse mortgage does not.

A HELOC also requires the homeowner to qualify for it most likely involving income verification and a credit check. A reverse mortgage does not require the same level of qualification.

If a homeowner pays the monthly interest each month on their reverse mortgage, they will have created the same situation as they would with a HELOC except they cannot lose the home for missing payments as reverse mortgage payments would be voluntary not mandatory and all the other negative downsides of a HELOC do not apply.

A HELOC may be a better option if the homeowner doesn’t need the cash for something If they just want to have an emergency fund or something to tap into on a temporary basis so there would be no need to take out a reverse mortgage and get a large cash sum or monthly cash sums subject to interest.

While this was not written as an advertisement for reverse mortgage, I do want to thank two mortgage agents for their transparent input.

Michael (Mich) Sneddon, CPA, CA
Mortgage Agent, Real Estate Agent and Chartered Accountant
https://www.ReverseMortgagePros.ca/
Dominion Lending Centres Edge Financial
License #10710

Athena Constantinou, Chief Operating Officer & Co-Founder
Sherwood Mortgage Group
www.allbiz.ca/sherwood-mortgage-group

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