Many retired Canadian homeowners return from their snowbirding months in the United States with thoughts of reverse mortgages fresh in their minds. Although these home equity conversion products are widely available in the US, Canadian homeowners do not have an open, competitive reverse mortgage marketplace to shop in.
A reverse mortgage allows a homeowner to convert home equity, or accumulated value locked in the house or condominium, into a lump sum of cash, stream of income or a combination of these payment types, without having to make repayment until some pre-set time in the future. Qualification is based on the value of the property and the age of the homeowner (reverse mortgages favour those 70 and over), not on income.
On the plus side, the homeowner retains ownership and continues to enjoy the home. On the downside, maintenance, repairs, property taxes and other costs of home ownership remain a financial burden. In fact, failure to meet these obligations will result in the reverse mortgage, like any mortgage, being in default so that full repayment of the debt may be demanded by the lender.
Although the Canadian reverse mortgage marketplace got off to a solid start in the early 80's, it imploded during the recession. The high-rolling stock market and mutual funds industry offered such easy, consistent financial returns that reverse mortgage lending got lost in the shuffle.
Canadian banks may advertise reverse mortgages but they do not lend. Banks and other financial institutions take a small commission for referring business to the Canadian Home Income Plan Corporation, a company based in Vancouver which is gradually expanding its lending across Canada and outside major urban centres. In Ontario, credit unions offer a reverse mortgage line of credit that is not limited to mature homeowners as other reverse mortgages are. In Quebec, a few credit unions offer programs to their members.
The Canadian government has been an on-looker, not an active participant like the US government which has encouraged reverse mortgage choices for Americans. Although the Canadian National Housing Act was amended to allow reverse mortgage insurance that could be a catalyst in creating a competitive reverse mortgage lending environment, the government is waiting for demand to prove itself first so that it can create a program that will pay for itself.
In the meantime, reverse mortgages may be arranged privately if existing commercial products don't suit your needs. Intergenerational financing may be the way to help children and grandchildren build their financial holdings while providing reverse mortgage income to their parents or grandparents. Since reverse mortgages are fully secured against property and involve interest that is compounded every six months (or more frequently), these financial vehicles can be excellent investments.
Homeowners may decide on a reverse mortgage to liberate accumulated home equity if they find themselves in a house-rich, cash-poor situation or want to take advantage of the tax-free status of funds liberated from their principal residence. Reverse mortgages may be used to modernize your home, buy a new furnace, add on a caregiver suite, finance a new business or arrange a trip around the world. How you use the money is up to you. However, the most important thing to remember with reverse mortgages is that they may be your worst enemy if you chose this solution when a less expensive approach would have solved your needs.
A reverse mortgage can erode home equity faster than the decades it took to pay off your traditional mortgage. A reverse mortgage debt may double in less than ten years and continue to increase over the years as interest compounds the debt. If your property does not increase in value very quickly, you may be stuck with too little remaining equity to finance a move if you want, or need, to make a change a few years down the road.
Remember, a reverse mortgage can be your best friend or your worst enemy. Always explore all your options before signing on, or you may end up signing your home equity away unnecessarily.
For information on reverse mortgages: "Have Your Home and Money Too" Second Edition, John Wiley & Sons, by PJ Wade. Contains the full range of alternatives to reverse mortgages and a complete guide to shopping for one. Also visit PJ's Resource Library at www.thecatalyst.com for more on reverse mortgages.