Reverse mortgages are particularly popular among older homeowners looking to stay in their homes while accessing an affordable loan. Reverse mortgages don’t typically require monthly payments, which is the main reseason those with a fixed income find them appealing.
As with most unconventional financial products you could scour the internet and find stories about reverse mortgages gone wrong. But like anything found on the internet, it’s important to take it all with a grain of salt.
What Is A Reverse Mortgage?
A reverse mortgage allows Canadians, typically those who are retired, to borrow up to (but not exceeding) 55% of their home’s value. Compared to other borrowing options, like a HELOC, a reverse mortgage only needs to be paid back when specific circumstances occur. If you sell your home, move out, default on the loan or if the titleholder(s) passes away, all of these will trigger a reverse mortgage payment.
It should be noted that defaulting on your reverse mortgage and losing your home doesn’t happen as often as the internet would lead you to believe. Many variables and factors come into play when these circumstances come into effect.
Common Reverse Mortgage Complications in Canada
Often the tales you hear of reverse mortgage issues are concerning homeowners in the United States and generally do not pertain to Canadians. This happens for a few reasons.
Most Canadian Lending Options Are Stable And Ethically Handled
In 2008 during the financial crisis, it was Canadian lenders who navigated that landscape with restraint in comparison to American lenders.
While the US was quite lenient and loose with its lending practices, which led to a high volume of bank failures and home foreclosers, Canadians weren’t subject to the same full-blown crisis. And no banks failed which speaks volumes about the checks and processes that have been established in Canada.
Canada has maintained a steadfast approach, allowing for the navigation of banking emergencies since 1907, another time in 1930, and most recently in 2008.
One of the critiques of the American lending system is that mortgages were provided to people who could not reasonably carry them. This targeting practice of lending to financially struggling individuals creates unsteady ground – which leads to foreclosures. The reverse mortgage can be a useful tool, but when best practices aren’t followed, this product can cause issues for the borrowers.
In Canada, reverse mortgages have actually increased by 28% but with stable practice; that is why don’t hear the same negative sentiment.
The Fees For A Reverse Mortgage In The US Are Higher
In the US, the fees associated with a reverse mortgage, compared to Canada, are larger. Some American lenders include ongoing charges that are not made readily known and borrowers don’t find out about them until they’re already locked into their contract agreement.
But Canadian lenders have more sensible fees and must be transparent about them by law.
The American Mortgage Market Is Merciless
In the 1990s, long-standing legislation was repealed which allowed American banks to sell and offer their mortgages as investments. This created an incentive in the market and allowed them to issue a vast number of reverse mortgages.
In comparison, in Canada there are two reverse mortgage lenders, those being Equitable Bank and Home Equity Bank. Canada doesn’t allow or have the same market landscape as America, which uses reverse mortgages to raise their share prices creating competition and increasing the probability that a reverse mortgage will be given to someone who can’t carry it, thus ending in default.
This is one of the driving factors that allowed the Canadian banking system to navigate through the 2008 financial crisis in one piece. Canada has established strong consumer safeguarding, protecting citizens from any sort of lending incentives.
Canada And Consumer Security
In Canada, to qualify for a reverse mortgage, all of the property owners must be over 55-years-of-age. In contrast, (before 2014) American lenders only required that one owner is over the age of 62.
This sort of lenient lending created potential issues for the borrowers, who were unaware of how it would affect their loans and lives. If the older spouse passes away, it then would leave the other in a situation of having to pay the mortgage balance immediately. This is one of the factors that created a negative stigma around reverse mortgages.
With Canada’s safeguarding practices, it means that the loan is only triggered after the last borrower dies.
Common Myths Regarding Reverse Mortgages
There are a few myths floating around that give reverse mortgages a bad reputation. Here are the three most common reverse mortgage myths.
First Myth: The Bank Will Own Your Home
Out of all the misconceptions surrounding reverse mortgages, the most prevalent is the belief that the bank will own your home – which is false. This notion that the bank will own your home is partly due to the fact that you don’t make regular payments on a reverse mortgage.
There is no hidden stipulation that the bank can in any way force you to sell your home or anything you wouldn’t otherwise do as a responsible homeowner. With a reverse mortgage, you retain ownership of your home so long as you maintain your home and keep up with your home insurance payments and property taxes.
Second Myth: You Could End Up Owing More
Many Canadians assume that interest will continue to build on their reverse mortgage indefinitely, which could cause them to owe more if it were true. However, Canadian reverse mortgages generally guarantee that you’ll never own more than what your home is worth, so long as you maintain your obligations as a responsible property owner.
In fact, many Canadian reverse mortgage borrowers have more than 50% equity to spare when they pay off their loans.
Third Myth: It Will Be A Headache For Your Heir
Another major myth is that having a reverse mortgage will leave your heirs holding the proverbial bag. No one wants to pass away and leave their kids in an entanglement of legal and financial troubles.
Commonly when a reverse mortgage ends, the family is left in control with well over 50% of the property’s equity – which results in quite an abundant inheritance.
Is A Home Equity Loan Or A Reverse Mortgage A Better Option?
As with anything, not every financial product or loan fits everyone. It’s always good to explore your options, do your research, and figure out which path forward is best for you and your family. If a reverse mortgage doesn’t seem like the appropriate avenue for your needs, you may want to investigate a home equity loan.
With a home equity loan, you’re able to borrow more (80%) compared to the 55% available on a reverse mortgage. As you can see, there is a drastic difference in lending capabilities and that extra money could be perfect for your home renovations, business development or anything else you need the cash for.
Moreover, a home equity loan often has lower interest rates, making it a more affordable option.
For over 50 years, Alpine Credits has been helping homeowners unlock the equity in their homes. With Alpine Credits, you can get your home equity loan deposited into your account once your application is approved. If a home equity loan sounds like the product for you, then Alpine Credits can help get your loan approved within 24 hours.