There’s a lot of talk about reverse mortgages these days. To explain how they work and summarize what you should know, mortgage expert Jeff Dillon has agreed to answer questions. This is the first part of a three-part series on this hot financial topic.
By Jeff Dillon
What is a reverse mortgage and how does it differ from a regular mortgage?
Reverse mortgages are similar to regular refinance mortgages in that they enable people to access the equity in their home. For most homeowners, the equity in their home is their largest single asset. With regular mortgages, applicants must qualify based on income and credit and regular monthly or bi-weekly payments are required. Given today’s higher interest rates, and a qualifying rate that is two per cent above the actual rate, many people do not qualify for the mortgage amount they want or need.
With reverse mortgages there are no required payments and there is no minimum income requirement. Reverse mortgages are only available to individuals or couples who are 55 years or older. They allow homeowners to access up to 55 per cent of their home equity by way of a lump sum and/or regular monthly advances. The funds they receive are non-taxable. The older the individual or couple, the more equity they are able to access. The amount also depends on the property type and location.
Regular mortgage payments are amortized over a predetermined period of time (up to 30 years). The mortgage balance reduces over time with a portion of each payment going to interest and a portion to reducing the principal balance. With reverse mortgages, the interest is added to the amount borrowed and accumulates over time.
Why have reverse mortgages become so popular in recent years?
There are a number of factors contributing to the increase in popularity of reverse mortgages. A major factor is demographics and our aging population. Baby Boomers (born from 1946 to 1964) are entering or have already entered the 65+ age group and the number of people aged 65+ is expected to increase significantly in the very near future. A large percentage of these seniors are homeowners and approximately 90 per cent want to remain in their home.
Canadians are living longer. Today’s seniors tend to be in better health and more physically active than in previous generations. They are able to do more and travel more and that often requires additional income that many people do not have access to through traditional channels such as savings and government pensions.
House values have increased dramatically in recent years, allowing access to significantly more equity. According to the Canadian Real Estate Association, the average house price in January 2019 was $454,776. In January 2024 the average price was $659,395. The numbers will obviously be different depending on where a person lives but, regardless, the percentage increase over that relatively short period of time is unprecedented. House values will continue to rise over time, as they always have. The interest that accumulates on a reverse mortgage can be offset to a large extent by house price appreciation. The mortgage doesn’t need to be paid off until you move or sell your house.
Are there any drawbacks or misconceptions associated with reverse mortgages?
One perceived drawback is that interest rates on reverse mortgages are higher than on regular mortgages. This is largely due to the fact that reverse mortgage lenders don’t require payments over the term of the mortgage. With regular mortgages, lenders bring in millions of dollars in payments each month which are put back out in new mortgages that generate additional profit.
Common misconceptions include the idea that the reverse mortgage company owns your home. That is not the case. The home is secured by the mortgage the same as a regular mortgage, but title remains in the homeowner’s name at all times. Another misconception is that unpaid interest will erode all of your equity. Conservative lending practices (55 per cent maximum loan to value) in addition to house value appreciation ensure that your equity is protected. Most reverse mortgages are non-recourse loans. That means you can never owe more than the house is worth, as long as you maintain the home and keep your property taxes and insurance up to date.
What do people typically use reverse mortgage funds for?
That depends on the homeowner’s unique situation and needs. The funds can be used to eliminate debt payments, such as an existing mortgage, credit cards, lines of credit and auto loans. They can also be used to increase monthly cash flow, take more vacations or simply reduce financial stress. Some people use the funds to renovate their home, buy a vacation property, cover medical expenses or assist family members. For most people the biggest benefit of a reverse mortgage is that it allows them to remain in their home stress free.
Jeff Dillon
Mortgage Agent Level 2
The Mortgage Professionals
Kingston (Lic #10280)
If you have more questions,
you can reach him at
jeff@mtgprof.com or
613 453-3663
