Reverse Mortgages: It Might Be Time To Learn About Them!

You have seen commercials and advertisements for reverse mortgages.  The players in the field have utilized instantly recognizable Canadian celebrities such as Kurt Browning and Peter Mansbridge to promote their products.  That’s right—those ads!  For younger adults, especially those with high six-figure mortgages, reverse mortgages might seem like irrelevant products. 

Given that reverse mortgages are only available to Canadians who are fifty-five years of age or older, they are indeed not top-of-mind for those in their 20s, 30s and 40s.  However, learning about reverse mortgages makes a tremendous amount of sense if you know that your adult parents are struggling financially while living in a mortgage-free (or nearly mortgage-free) home, or if you find yourself thinking about how you are going to finance your retirement given limited savings.

The Retirement Financial Crisis

“Money” is one of those taboo topics; we don’t talk about it enough and, as I have shared on these pages previously, we certainly don’t teach enough financial literacy in our schools.  It’s helpful, then, to dig into some survey results from trusted sources to get a sense of what’s happening for retirees and their money worries.

A recent survey¹ commissioned by CPP Investments provided these sobering findings:

• Approximately 60% of Canadians endure money-related stress daily
• Over 60% of Canadians are fearful of running out of money during their retirement
• Two-thirds of Canadians aged 28–44 indicate that they are worried about running out of money in retirement
• Canadians who are not yet retired now believe that they will need $900,000 in total to live comfortably during their retirement.

Given these stark findings, you would think that Canadians are “getting after it” when it comes to saving for retirement. Consider, though, that a recent survey²  commissioned by the Healthcare of Ontario Pension Plan (HOOPP) revealed that 44% of Canadians who are in the 55-64 age bracket, but not yet retired, have saved less than $5,000.  For MoneySavers, that seems hard to believe, but that’s the reality for many Canadians.  When you add in increased longevity, it’s no wonder that many Canadians constantly fret about money.  

Canadians Want To Retire At Home

In a National Institute on Ageing survey³, almost all Canadian respondents over the age of 65 indicated that they want to remain in their homes as long as they can.  Yes, for those of a certain vintage who have owned their home for decades, the family home has been a fantastic, tax-free investment.  That’s not the reason why we want to retire at home, though.  Canadians want choice when it comes to where they live during retirement, and living at home provides the independence that they crave.  The family home is more than an investment; we all know that housing remains an emotional issue in this country.

Given this reality, reverse mortgages tick a lot of boxes for many.  These mortgages are designed to allow Canadian homeowners who are at least fifty-five years of age to access the equity in their homes without making any mortgage payments.  In some ways, this is a big leap since these folks likely spent decades paying down mortgages and, in many cases, have viewed being “mortgage-free” as a major lifetime achievement.  However, for many seniors with limited monthly income, tapping the equity in their homes may make sense to accomplish financial priorities such as funding a more vibrant retirement lifestyle, coping with escalating health care costs or assisting adult children and/or grandchildren by “giving with a warm hand.”

What Is A Reverse Mortgage And How Does It Work?

Let’s start with what a reverse mortgage is not.  A reverse mortgage is not a home equity line of credit (HELOC).  It’s not an unsecured loan either, and it’s certainly not like credit card debt.  To be clear, a reverse mortgage is a debt instrument that is secured by the equity in your home.  For those with cash flow issues, a key element is the repayment terms; monthly payments are not required although the client can make partial payments and interest payments if they so choose.  The number fifty-five is again important—up to 55% of the home’s value can be accessed, and those dollars are tax-free.  Importantly, the client still retains both ownership and title of the property.

Again, repayment terms are cash flow friendly with reverse mortgages; “friendly” as in no monthly payments are required.  On the other hand, an outstanding HELOC balance will need to be serviced by making monthly minimum interest payments at the very least.  Monthly payments are a reality with both an unsecured loan and a credit card balance too.

For clients that do access home equity via a reverse mortgage, interest accrues (or builds up) over time up until the debt, including interest, is paid back.  This can lead to the value of the equity in the home decreasing as time passes, especially if the housing market’s gains are muted. As we know, though, home valuations have certainly risen strongly over the long term in this country.

Lenders who are in the reverse mortgage business have several different reverse mortgage products that they offer to Canadians.  They typically will include several minimums, such as a minimum property value and a minimum borrowing amount.  Certain events, such as the property being sold, or the death of the last individual who borrowed the funds, will trigger the need to repay the mortgage in full (mortgage plus accrued interest).

An Example Might Be Helpful

Let’s say that a couple in their early 60s decides to consider a reverse mortgage.  They have a home with an appraised value of $800,000 and no mortgage.  They decide to secure a $206,500 reverse mortgage with an interest rate of 7.39%. If their home appreciates annually by 3%, the property’s value will grow to approximately $1,075,000 in a decade.  Interest costs will be approximately $230,500 over the decade.  On the day that they took out the reverse mortgage, their home equity was equal to $593,500 ($800,000 appraised value less $206,500 reverse mortgage).  With the above assumptions, their home equity would have grown to approximately $638,000 after the decade ($1,075,000 approximate home valuation less $206,500 reverse mortgage less approximately $230,500 of interest).  Remember, the couple would have made no monthly mortgage payments over that decade.  For cash-strapped seniors, you can see why reverse mortgages are appealing.  (note:  all figures taken from Your guide to the CHIP Reverse Mortgage, by HomeEquity Bank, 2023 Edition, pg. 10⁴)

Seek Professional Advice

The stats certainly indicate that Canadians are struggling financially; this is unfortunately a reality for our seniors, too.  For younger Canadians, their parents might be battling through these challenges right now.  While a reverse mortgage is not for everyone, more and more Canadians are at least open to exploring this option as a way to benefit from the significant home equity that they have built, while continuing to age at home. Consulting with a mortgage professional would be wise before committing to any financial path such as this.  (note: the author is a licensed mortgage agent)

Fred J. Masters, BBA, BEd, PQP, is the author of Lessons on Mastering Money: The Personal Finance Guide for Canadians in their 20s & 30s. He is the President of Masters Money Management Inc. and has given financial wellness presentations to all demographics in Canada, including university students and alumni.  He is a retired professional educator, having taught senior financial accounting for decades.  He is also a licensed mortgage agent with Mortgage InGenuity Inc. and can be reached at F.Masters@mastersmoneymanagement.ca. To find out more, visit www.mastersmoneymanagement.ca.

1      https://www.cppinvestments.com/wp-content/uploads/2024/10/Backgrounder_Retirement-Survey_CPPIB_Oct30_2024_EN.pdf

2      https://hoopp.com/news-and-insights/research-and-analysis/2023-canadian-retirement-survey

3      https://www.niageing.ca/commentary-posts/2020/9/22/almost-100-per-cent-of-older-canadians-surveyed-plan-to-live-independently-in-their-own-homes-but-is-this-even-possible

4      https://www.chip.ca/chip-reverse-mortgage-guide/

This work contains the author’s opinions and ideas as related to the subject matter.  The content is by no means designed to provide any reader with individual financial advice.  Note that past performance is not a guarantee of future results when it comes to any specific investment or investment strategy.  Always consult a competent financial professional for advice when it comes to making financial decisions.  No guarantee is made with respect to the accuracy or completeness of the content.