For homeowners looking to access a large amount of money, a reverse mortgage can seem like an ideal solution. Available to homeowners who are 55 and older, this form of unique mortgage allows you to convert as much as 55% of your home’s equity into cash without selling your property. However, while this financial tool can provide a great source of cash flow during retirement, it can also lead to potential scams from fraudulent lenders that could rob you of your life savings.
This article will discuss what a reverse mortgage is, as well as potential reverse mortgage scams so you can stay informed and safeguard your financial future.
What Is A Reverse Mortgage?
In Canada a reverse mortgage allows homeowners who are 55 or older to tap into as much as 55% of their home’s equity and retain full possession of their property. A reverse mortgage is appealing because you don’t need to sell your property or make monthly mortgage payments. Instead, the borrowed funds and any interest owed only need to be repaid when you sell the home, move out or pass away.
Reverse Mortgage Scams In Canada
While a reverse mortgage can be a flexible, supportive financial tool, there are unscrupulous loan agents and scammers who will take advantage of those looking for loans. Here are some of the most common reverse mortgage scams to be on the lookout for:
Unlicensed/ Unscrupulous Loan Agents
As mentioned previously, there are two main financial institutions that offer legitimate reverse mortgages in Canada, HomeEquity Bank and Equitable Bank, so it may be a warning sign if you are approached by an agent who isn’t from either of those two banks.
It’s always wise to reach out to your territorial or provincial consumer affairs office to be sure the lender is licensed. You can also check with the Canadian Mortgage and Housing Corporation to verify a lender’s credentials.
High-Pressure Tactics/In-Home Visits
High-pressure tactics are a sign of trouble. These include being pressured to make quick decisions, being urged to sign documents without a full understanding of what you are signing and if the benefits seem too good to be true. Basically, you should never feel uncomfortable or pressured to make a decision when it comes to taking out a large loan. If you feel like you’re being pressured, do not sign any documents and speak to someone you can trust.
If the loan agent has come to your home (or worse yet, shown up on your doorstep uninvited) ask them to leave or contact the police for help.
Illegal Or Hidden Fees
It’s crucial to be aware there are legitimate fees associated with getting a reverse mortgage (just as there are fees when getting a traditional mortgage). These fees typically include home appraisal, set-up costs, legal fees, and closing costs. That being said, all fees should be clearly listed and there should be no hidden expenses. A legitimate lender will be upfront and transparent with their fees.
Loan Flipping
Loan flipping is a deceptive practice where unscrupulous lenders get borrowers to refinance their loans multiple times. With reverse mortgages, this can involve convincing a senior to take out multiple reverse mortgages, each with high fees and unfavourable terms, which can soon lead to an unsustainable debt load. Unlike traditional mortgages, reverse mortgages do not come with set terms so there should be no need to refinance.
Fraudulent Investment
Beware if someone pressures you to take out a reverse mortgage as a way to access cash to put into an investment scheme. These kinds of investments may not be legitimate and can lead to significant losses, making it difficult to pay back the original reverse home loan.
Protect Yourself From Reverse Mortgage Scams
Being informed and vigilant are the best ways to ensure you’re not a victim of a reverse loan scam.
- Research is key. Put in the time to make sure you’re dealing with a legitimate and reliable lender.
- Read the fine print. Nobody likes to read all the minute details of a contract but you should never sign anything you’ve not read and understood fully.
- Work with a lawyer. Spend the time and money to get a lawyer to review any documents before you sign. If in doubt, consulting with a financial advisor or a legal professional who specializes in real estate may be the best way to ensure you’re not being taken advantage of.
If You’ve Been Scammed
If you think you might be involved in a reverse mortgage scam, the most important thing is to act quickly and do the following:
- Call your local police department.
- Report the incident to the Canadian Anti-Fraud Centre.
- You may also want to consult with a legal professional to see if it may be possible to recover the funds.
The Benefits Of A Reverse Mortgage
A reverse mortgage is specifically designed as a flexible financial tool to support seniors who have equity in their homes but otherwise may not have ready access to cash. This kind of mortgage gives them access to large amounts of money without selling their home or altering their current living situation.
Unlike traditional mortgages where homeowners are required to make monthly payments to repay their loan, a reverse mortgage does not require any set monthly payments. While the homeowner can make payments if desired (though there may be prepayment fees), the borrowed amount and interest only need to be repaid when the homeowner sells the home or passes away.
The Potential Drawbacks Of A Reverse Mortgage
Reverse mortgages can be a useful financial product for seniors, but they have some potential pitfalls.
- High-Interest – One of the biggest concerns is that reverse mortgages come with higher interest rates than traditional mortgages, which can lead to a substantial increase in your loan balance if you don’t make any payments or hold the loan over several decades.
- High Fees – Reverse mortgages can also involve higher fees than those typically associated with more conventional mortgages.
- Lower Generational Wealth – Another concern is the loss of generational wealth, meaning that if you die and you haven’t paid off your mortgage, your loved ones will have a devalued inheritance. That’s because your beneficiaries will first have to pay back the loan before they can take possession of the property. If your heirs can’t repay the loan amount, the bank can then take possession of the home.
- Complicated Terms and Conditions – Finally, the terms and conditions of a reverse mortgage can be more complicated than those of a traditional mortgage so it’s vital that you understand all the details of the agreement before you sign.
These serious potential disadvantages highlight why it’s essential for potential borrowers to thoroughly understand and consider the implications of getting a reverse mortgage.
Getting A Reverse Mortgage In Canada
In Canada, there are only two main financial institutions that offer reverse mortgages:
- HomeEquity Bank
- Equitable Bank
You can apply online or call to start the application process. Usually, you’ll only be able to access up to 55% of your home’s value and the maximum amount you’ll get will depend on factors like your age, the appraised value of your home and your specific lender.
Alternatives To A Reverse Mortgage
Though a reverse mortgage can be a flexible and useful resource for the right individual, some borrowers may feel more comfortable with a traditional loan. If you need funds, here are some alternative options to a reverse mortgage.
Consider Downsizing
By downsizing to a smaller property or apartment your home maintenance expenses will be lower. Plus, you’ll have access to a large amount of cash from the sale of your home without worrying about mortgage fees and accumulating interest over the years.
Get A Traditional Mortgage
This would involve some initial fees and regular monthly payments, but it also comes with the benefit of a potentially lower interest rate compared to a reverse mortgage. Note, however, that a mortgage could be harder to get as your lender may require that you’re still earning a regular income and that you can pass the mortgage stress test.
A Home Equity Line Of Credit
A HELOC is a revolving form of credit based on your home’s equity. It can be a great loan option because you only pay interest on what you borrow and you’ll only need to make minimum monthly payments based on what you’ve withdrawn.
