Roger J. Chiasson took out a reverse mortgage three years ago and has never looked back since.
The 78-year-old and his wife paid thousands of dollars to repair their Barrie home to create a home they can stay in for as long as possible. But the couple faced a dilemma at the time: They were retired, had a steady income and still had debts.
That’s when they decided to think about the idea of a reverse mortgage.
“It’s an advantage if you want to stay in your home, which we decided,” Chiasson said. “We only lived on our pension and had to ask ourselves: is that enough?”
A reverse mortgage allows homeowners 55 and older to access a portion of their home’s equity in the form of a loan that carries higher interest rates than a typical mortgage or secured line of credit. Homeowners can access up to 55 percent of their equity in one lump sum or in monthly payments. But the homeowner doesn’t have to repay the loan until they either sell the home or die.
Many financial experts are critical of the product because it can quickly consume equity and homeowners and their families get nothing.
But it’s becoming increasingly popular among seniors. According to the Office of the Superintendent of Financial Institutions, reverse mortgages were up 35 percent in December 2022 from a year earlier.
HomeEquity Bank, the largest issuer of reverse mortgages in Canada, reported $1 billion in new reverse mortgages for 2022, a 30 percent increase from the previous year, said Vivianne Gauci, HomeEquity Bank’s senior vice president.
So is applying for a reverse mortgage the right move when you’re in a liquidity crunch? Experts say it’s important to exhaust all other options before considering it: while a reverse mortgage frees up some money to pay off debt and stay in a home longer, it comes at a hefty price.
Interest rates are higher than a typical mortgage — Chiasson pays nearly 10 percent interest — and compounded monthly.
Lenders have online calculators for interested homeowners to work out how much interest they would pay, said Jason Friesen, managing partner and mortgage broker at Outline Financial.
For example, a 75-year-old who owns a $1.5 million home can access $645,000 in funds but has to pay $253,000 in interest over a five-year period.
“That’s almost $900,000 that you’re borrowing between interest and equity, that adds up pretty quickly,” Friesen said. “It definitely eats up a lot of your equity.”
The equity and interest must be repaid upon sale or upon death, so this may affect the inheritance that children or other family members may receive.
Getting a line of credit is a better option that doesn’t cost as much, said Ron Butler, mortgage broker at Butler Mortgages.
“You can easily get a line of credit and make the minimum payment every month,” he said. “There is no monthly compound interest. It’s more flexible and has no fees.” Also, there’s no penalty if you want to break it, he added.
Selling the house and downsizing is also a better alternative, said Friesen. When a homeowner sits on a $2 million lot, they can either downsize and buy or rent a condo, and not have to deal with the headache of maintaining the property. A condo or apartment also offers the prospect of elevator access to help the elderly with mobility issues.
“If you look at your quality of life, wouldn’t you want a smaller apartment with amenities and not have to worry about home repairs?” Friese said. While people can be emotionally attached to their home, sometimes staying in a large residence isn’t practical, he added.
There are a few reasons why reverse mortgages are becoming more popular, the first being the aging population. People are living longer and therefore aren’t saving enough for retirement, said HomeEquity Bank’s Gauci.
Real estate values have also risen drastically in the last five years. In Toronto, the average house price has risen nearly 25 percent and people have gained significant equity despite last year’s decline, Gauci added.
The cost of living has risen significantly, she said, leaving people on a fixed income living only on their monthly pension payments with a liquidity crisis.
There is also a growing movement towards aging, said Ajay Singh, President of Presto Mortgages.
“People have been hearing horror stories about what was happening in retirement and nursing homes during the pandemic, and it’s pushed more people to want to stay in their homes for as long as possible,” he said.
While Chiasson loves what the reverse mortgage has made possible for him, he stressed that homeowners must be careful to ensure there is still some equity left in the home if they decide to sell it.
“You have to ask yourself what equity do you want when you decide to sell your home? And you have to stick to that number,” he said.
Chiasson declined to disclose how much equity and interest his lender has provided over the past three years, but receiving a reverse mortgage “freed him in every way.” He and his wife use their reverse mortgage payments to plan each month and hope to stay in the house “a very long time.”
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