Have you considered a reverse mortgage?

Dear Money Lady Readers:

Many seniors have considered a reverse mortgage, but most have kept their thoughts a secret, not wanting to discuss it with friends or family, owing to the “shame” of having one.

First up, let’s address that shame square in the face. There is none! There is no shame in having to resort to a reverse mortgage if you’re running out of money and wish to age in place just a little longer. I am so tired of hearing from bankers who claim that it’s a horrible product that just forces seniors into boatloads of debt through the compounded interest that over time will suck-up the entire value of their home and leave them penniless and homeless.

Do you think that the Canadian banks that currently offer reverse mortgages (HomeEquity Bank and Equitable Bank/EQ Bank) would ever want that kind of bad press? There are matrices in place to ensure you cannot take out arbitrary amounts of your home equity at will, all based on your age, your home value, location, future value and your current debt situation. HomeEquity Bank is owned by the Ontario Municipal Employees Retirement System – Canada’s largest defined-benefit pension plan corporation – and EQ Bank, which has $137 billion in assets under management, owns Concentra Bank, which partners with 90 per cent of Canadian credit unions. There is also a new player on the Canadian scene this fall, as Home Trust just launched its reverse mortgage, which is called equity access reverse mortgage.

So, let’s chat about how reverse mortgages work and perhaps I can give you some insight into this product.

First of all, a reverse mortgage is just that, a mortgage. That means you will take it out for a set term (most likely a five-year fixed term), and you will be given a lower promotional rate as a new customer. You can choose either a fixed or variable rate, open or closed with different terms (from one to 10 years). When your mortgage comes up for renewal after the initial term, you will need to renew it again for another term, but most likely now at a much higher rate. Interest will accrue monthly, not just on the outstanding principal owing, but also on the previous months’ interest, since you are not making any payments to keep up. Loan amounts will be offered based on age and the appraised value of your home, with lower interest rates only offered to those over 80 years of age. Advertisements suggest you can easily get up to 59 per cent of your equity at age 55, but this is not true. The younger the applicant, the more the restrictions. This is a better product for aging seniors in their 80s or 90s who can’t move and are running out of money.

I have always believed you should use real estate to prop up and financially assist your changing lifestyle should you go through career failure, divorce or personal change. For most, it’s their biggest investment asset. Being emotionally tied to your home is understandable; for many of us it’s become our identity. But here’s the banker talking to you now – stop being so emotional, it’s an investment asset and that’s it.

If things are financially tough for you due because of changes in your life, you need to sell, downsize, or use your home to amalgamate your debt to start again. Anyone over 58 years of age needs a slap (a theatrical slap; not a real one). Time is running out. If you have debt, you need to get rid of it. A reverse mortgage is not your option. Get your finances in order, pay off all your debt, build yourself a “fun-money-account” for hobbies and travel, max up your TFSAs (tax free savings accounts) and move to a home you can age in that is less expensive. Financial certainty is your goal now. Forget your adult kids – let them fend for themselves (you did, at their age). Join the ranks of happy seniors you will meet on future cruise vacations, commiserating about your adult kids’ problems, your past nasty co-workers and passing around proud pictures of your grandchildren. This is your priority now.