“That leaves a total of $204,939 outstanding, with interest at 25% of the balance after just five years,” says Ardrey. “Over time, that can exceed the entire value of the home. Fortunately, they find there is no negative equity, but at the end of the day, there isn’t much left for the homeowner or their heirs.”
Heath points out that rates of interest on reverse mortgages are typically much higher than traditional sources. “A borrower can expect to pay at least a few percentage points more than they would with mortgages and lines of credit. But if you read the fine print in your home equity loan agreement, the lender typically reserves the right to lower your limit or even call in the outstanding balance.”
Therefore, homeowners mustn’t depend on their HELOC being available after they need it.
Currently, variable rates on reverse mortgages are within the 9.5% range, while variable rates on 5-year mortgages are around 6% and 5-year fixed rates are around 5%. HELOC rates are generally 1% above prime rates, so that they are currently around 7.95%. “There is definitely a premium to be paid to take advantage of reverse mortgages,” Heath says.
Ardrey raises one other concern: How can nursing home care be financed? “Often, when a senior moves into a nursing home, a home can be sold so they can pay for that care. In this example, the ability to use the home for that purpose would be significantly limited.”
He suggests that fairly than taking out a reverse mortgage that might smash their financial future, retirees should take an honest take a look at their situation and the approach to life they will afford. “While selling their home and living elsewhere may not be desirable, it may also be their financial reality. This speaks to the importance of planning ahead to avoid being house rich but cash poor.”
What alternatives are there to a reverse mortgage for Canadian retirees?
Allan Small, senior investment advisor at IA Private Wealth Inc., says reverse mortgages “have not played a role in the retirement plans and retirement savings that I have created so far in my career. I think the idea or concept of the reverse mortgage has not caught on for some reason.” Additionally, “the private investors I see usually have money to invest or have already invested it. Most are downsizing their home and pulling out the equity that way rather than pulling money out of the property while they are still living in it.”
Finance professor and writer Moshe Milevsky wrote me in an email that in terms of reverse mortgages—or other financial strategies or products in the realm of de-savings—“I always ask myself this question before I give an opinion: Compared to what?” He worries concerning the rate of interest risk involved, which is “difficult to control, manage, or even understand in old age with declining cognitive abilities.”
