What are Reverse Mortgages?

A reverse mortgage is a loan secured against your home where you do not have to pay back principle or interest as long as you live there. Your mortgage lender may pay all of the proceeds to you at once, as regular monthly advances, or at other times and in amounts that you choose. How do you pay your mortgage back? You pay the money back plus interest when you pass on, sell your home, or permanently move out of your home.

If you understand the principle of compounding interest, the same principle applies to reverse mortgages, with one important difference. Reverse mortgages cost you the interest at the end of your term, rather than paying it to you. In other words, your mortgage balance will increase through time, and interest will compound and accrue on the ever-increasing outstanding principle.

Reverse Mortgage Calculator for Canadians – Some Examples

Reverse mortgages are a mortgage loan tool often used by financial planners to unlock trapped equity in real estate for tax-free income for seniors (aged 62 and older). But buyer beware!

There are a few important considerations and key differences between a reverse mortgage and other financial planning tools. For instance, where normal amortizing mortgage loans have interest rates that are near prime lending rates or bond rates, reverse mortgages often have annual percentage rates (APR) that range from prime plus 1.5% to as high as 10.75% and beyond in the 2008, for example. This means for a $50,000 reverse mortgage drawn in 2008, the mortgage borrower could owe over $100,000 in 7 years (2015) and over $200,000 in 7 more years (2022). Yes, the property will have appreciated, but unless the market is exceptionally strong and outpacing both inflation and the APR of the reverse mortgage, the overall net worth of the borrower will decline.

Consider inflation at an annual rate of 2.5%, as it was in November 2007 (according to Statistics Canada). With a reverse mortgage interest rate at 9%, your property appreciation and return on any investments must outpace both appreciation and cost of borrowing to break even and not lose equity. This assumes of course, that you invest every penny of the reverse mortgage proceeds and not take any as income.

Reverse Mortgages are Administered by Reverse Mortgage Lenders

In Canada, reverse mortgages are often administered by reverse mortgage lenders and called CHIP (Canadian Home Income Plan). These can be presented as a last resort and the best option for seniors to increase income, change lifestyle or cover healthcare expenses in their golden years.

The National Reverse Mortgage Lenders Association, based out of the US, also provides information and tools that support reverse mortgages. While it is true that reverse mortgages are one option, they are an expensive one. In effect, they cannibalize any equity in your property, which may contain all of the wealth in your estate. What if you live longer than your reverse mortgage plans for, or what if your financial needs increase in time?

If you are considering a reverse mortgage under the CHIP or some of the other financial planning tools available to you, talk to the creative professionals at MBN Mortgage. We invite you to compare our solutions and mortgage information to other sources. Many of our clients have achieved—and exceeded their income needs, continued to build a legacy for their estate and reduced the mortgage loan costs associated with reverse mortgages.

Our financial partners and mortgage loan specialists work together for your financial goals—at every stage of your life.