What is a Reverse Mortgage?
You have worked all your life to pay for your house, raise a family, send the kids to college and retire comfortably. In an ideal world, you would be set until you leave this one. You own your house outright. You are living off of your RRSP, savings, pension, and investments. You don’t owe the bank anymore.
So, naturally, the bank finds a way to get back into your back pocket: Reverse Mortgages.
Reverse mortgages at a first-glance are very appealing. They have been on an upward trend in recent years, leading many more to consider it as an option later in their retirement years. While a good option for some, it really should be viewed as a last resort for most seniors. A reverse mortgage is basically a loan against your home equity, and it is primarily used by seniors and retirees who have paid off their home in full. The ‘loan’ is then paid back in full, plus interest, when the house is sold, or when the owner dies (in which case the bank sells the house for you). The difference between a normal mortgage and a reverse mortgage is that there are no monthly payments on a reverse mortgage. You receive a lump sum of money, up to 40% of your home’s value, and then the bank just adds interest each month until it comes time to pay.
For the banks it is a win-win. There is no chance you will default on the loan, as you already own your own home. The longer you stay in the house, the more you owe them. In essence, (although not legally) you are in fact giving your house back to the bank, and living off the cash you already used to pay for it the last 20 years.
A few positive things reverse mortgages might be used for are home renovations, investment opportunities, medical bills, or paying back other high interest debt. If the income or advantages gained from a reverse mortgage outweigh the value you will be losing in your home, it may be worth looking into.
For those taking out a reverse mortgage to go on vacations, buy a fancy car, a boat, or squander your money away, it would not be a wise decision. Of course, it is completely within your right to do that; they are your golden years after all, and you deserve to enjoy them. If you are set on doing that, you would be better off looking into Home Equity Line of Credit, or just selling your house outright, downsizing to a condo or a less expensive home, and taking the extra cash to do what you wish. Remember your kids and grandkids as well, as it’s nice to pass on your success to your descendants.
Another thing not often mentioned is that you never know how old you may be when you pass away. If you retire at 65, take out a reverse mortgage at 75, and stay healthy until you are 90, you will have likely lost the majority of the value of your home back to the bank in compounding interest the last 15 years. At that point, you would probably be near the end of your savings, your home equity would be dwindling, and you may continue to live up to 95 or even 100.
Always remember to plan for the long term, even in the latest years of your life. It is better to have too much, than to find yourself just scraping by the last few years of your life. A reverse mortgage should really be a short term solution. Keep your reverse mortgage a maximum of five years. Don’t forget, there are always hidden costs as well, such as bank fees, lawyer fees, and taxes.