Seniors in Ontario are faced with a plethora of different retirement options. Some good, some not so good.
This week we would like to discuss the topic of reverse mortgages for seniors and the pros and cons of them.
Just the other day an article was published stating how HomEquity Bank has reported a 26% increase in reverse mortgage sales in 2016 alone.
CEO Steven Ranson said, "we are very proud of the growth we've attained in 2016, at a time of remarkable appreciation in real estate values, we are privileged to help Canadian seniors access that equity."
Sounds great right?
Well before we can call reverse mortgages a "great" option for seniors, let's look a little deeper at what they are and some of the hidden costs involved with them.
First things first, a reverse mortgage is a loan designed for homeowners 62 years of age and older. Additionally if they have a spouse, they need to be 55 years and older to quality.
Secondly, a reverse mortgage is secured by the equity in your home, which is the portion of the home's value that is debt-free. It allows homeowners to obtain cash, without having to sell their home. The loan can be up to 55 percent of the current value of your house if you are 90 years old, and 30 percent if you are younger than 75.
With that being said, reverse mortgages have many fees that a mortgage representative probably won't tell you about...
They include: higher interest rates, loan origination fees, legal fees and various closing costs which when added up are extremely high when compared to a traditional mortgage. Costs vary... but when added up can be as high as $30,000 or $40,000 +!
And this cost is not paid out of pocket, but rolled into the loan, essentially meaning you are accumulating debt on debt.
Not only are the fees incredibly high, but reverse mortgages are always higher than prime rates (reverse mortgage rates are currently sitting at 6.49%). We encourage you to compare the rate you're quoted versus the current prime rate. You'll see for yourself how high they really are.
Another potential issue you need to be aware of is the requirement to pay back the loan if you should move out of your home or become ill (which happens more then you think at 62+). This means you will become burdened with debt at 62 + years old...
The final downside of a reverse mortgage has to do with your estate. The reverse mortgage will always decrease the equity in your home leaving your heirs (grandchildren etc.) with less money. Not only this, but at your death, your estate (and heirs) will have to repay your loan and interest in full within a limited time plus pay a penalty of $2,000 180 days after your death if the loan is not repaid in full. Not until probate passes can your home be sold which can take up to 3 years.
We'll let you read that again for it to fully sink in.
If we were to say it differently, reverse mortgages are an incredibly expensive option that will hurt A LOT of seniors.
And this isn't just our opinion. Statistics show that half of all seniors are in debt and 30% of all seniors declare bankruptcy.
Bankruptcy at 62 years old!
I think we can all agree this is not a situation any senior should be in.
So what should you do?
Your first step should be to educate yourself on all of the retirement options available in Ontario and then decide which one suits your needs the best.
Go online and do your own research. Or, read our free resource we've created to help seniors navigate the expensive retirement landscape in Ontario.