Three years ago, Roger J. Chiasson took out a reverse mortgage and hasn’t regretted it a single day since.
The 78-year-old and his wife paid 1000’s of dollars to repair their Barrie house to create a house to remain in for so long as possible. However the couple faced a dilemma on the time: they were retired, on a hard and fast income and still had debt.
That’s once they decided to mull over the concept of a reverse mortgage.
“It’s helpful if you ought to stay in your home, which we decided we desired to do,” Chiasson said. “We were just living off our pension and we needed to ask ourselves, was it enough?”
A reverse mortgage allows homeowners aged 55 or older to access a portion of the equity of their home in the shape of a loan which carries higher rates of interest than a typical mortgage or secured line of credit. The homeowners can access as much as 55 per cent of their equity in a lump sum or in monthly payments. However the homeowner doesn’t must pay back the loan until they either sell the house or die.
Many financial experts are critical of the product as it could possibly quickly eat away on the equity, leaving homeowners, and their next of kin, empty-handed.
However it’s growing in popularity amongst seniors. In December 2022, reverse mortgages surged by 35 per cent yr over yr, in line with the Office of the Superintendent of Financial Institutions.
HomeEquity Bank, the most important issuer of reverse mortgages in Canada, reported $1 billion in recent reverse mortgages issued for 2022, a 30 per cent increase from the yr before, said Vivianne Gauci, senior vice-president at HomeEquity Bank.
So is it the correct move to use for a reverse mortgage in case you’re experiencing a cash-flow crunch? It’s necessary to exhaust all other options before considering it, experts say: While a reverse mortgage frees up some money to repay debt and remain in a house longer, it comes at a high price.
The interests rates are higher than a typical mortgage — Chiasson is paying almost 10 per cent interest — and compounds monthly.
The lenders have online calculators for interested homeowners to determine how much interest they’d pay, said Jason Friesen, managing partner and mortgage agent with Outline Financial.
For instance, a 75-year-old who has a house value $1.5 million can access $645,000 in funds but must pay $253,000 in interest over a five-year period.
“That’s almost $900,000 you’re borrowing between interest and equity, it adds up pretty quickly,” Friesen said. “It definitely eats into a number of your equity.”
The equity and interest should be paid back on the sale or after a death, so this could impact the inheritance children or other relations can receive.
Getting a line of credit is a greater option that isn’t as costly, said Ron Butler, mortgage broker of Butler Mortgages.
“You may easily get a line of credit and make the minimum payment on it every month,” he said. “There isn’t that compounded monthly interest. It’s more flexible and has no fees.” Plus, there’s zero penalty if you ought to break it, he added.
Selling the house and downsizing can also be a greater alternative, said Friesen. If a home-owner is sitting on a property value $2 million they’ll either downsize and buy a condo or rent, and don’t need to cope with the headache of property upkeep. A condo or apartment also offers the prospect of elevator access to assist older people facing mobility problems.
“When taking a look at your quality of life, don’t you would like a smaller place with amenities and never need to worry about home repairs?” Friesen said. While people may be emotionally attached to their home, sometimes it’s not practical to remain in a giant residence, he added.
There are a couple of the reason why reverse mortgages are rising in popularity, the primary being the aging population. Individuals are living longer and subsequently haven’t saved enough for retirement, HomeEquity Bank’s Gauci said.
Home values have also drastically risen within the last five years. In Toronto, the typical home price jumped by almost 25 per cent, and other people have gained substantial equity despite the drop over the past yr, Gauci added.
The fee of living has increased considerably, she said, placing a money flow crunch on individuals with a hard and fast income who are only living off their monthly pension payments.
There may be also a growing movement to age in place, said Ajay Singh, president of Presto Mortgages.
“People heard horror stories of what was happening in retirement and nursing homes in the course of the pandemic and it’s pushed more people to wish to stay of their home so long as they’ll,” he said.
While Chiasson loves what the reverse mortgage has afforded him, he emphasized homeowners have to be diligent about ensuring there’s still some equity left in the home when deciding to sell.
“You have got to ask yourself, what equity do you would like whenever you determine to sell your home? And you have got to stick with that number,” he said.
Chiasson wouldn’t disclose how much equity and interest his lender has provided over the past three years, but getting a reverse mortgage “freed him up in all types of the way.” He and his wife budget every month with the help of their reverse-mortgage payments and hope to remain in the house for “a really very long time.”