Top 3 Misconceptions About Reverse Mortgages

 

  1. The Bank Owns Your Home
  2. Your Estate Can Owe More Than Your Home 
  3. The Best Time to take a Reverse Mortgage is at the End of Your Retirement

 

Let’s examine each misconception in more detail.

 

  1. The Bank Owns Your Home

 

FALSE. Over 50% of Canadian homeowners over the age of 65, believe the bank owns your home once you have taken a reverse mortgage. Not true! The lender will simply register their position on the title of the home, exactly the same way as you would expect any other mortgage or Line of Credit to be registered on title, with the main difference in the flexibility of not having to make Principal & Interest payments on the reverse mortgage. You remain the homeowner, you own the title. Period!

 

  1. Your Estate Can Owe More Than Your Home

 

FALSE. A reverse mortgage, unlike most traditional mortgages in Canada, is a non-recourse debt. Non-recourse means if a borrower defaults on the loan, the issuer can seize the home asset, but cannot seek any further compensation from the borrower – even if the collateral asset does not fully cover the full value of the loan. Therefore, when the last homeowner is moved to a nursery home or dies (and the reverse mortgage is due), the estate will never be responsible for paying back more than the fair market value of the home. The estate is fully protected – this is not the case for almost any other mortgage loan (specifically secured lines of credit) in Canada, which is full recourse debt. So read the fine print the next time you offer to co-sign for a loan for Mom!

 

  1. The Best Time to take a Reverse Mortgage is at the End of Your Retirement

 

FALSE. This is a common mistake that reflects the “old-school” financial planning mentality. For the majority of Canadians (without a nice government pension), the old school financial planning mentality is about cash-flow, and is as follows:

 a) Begin drawing down non-taxable assets to supplement your retirement income.

 b) Once your non-taxable assets are depleted, begin drawing down more of your registered assets (RSP/RIF) to supplement retirement income.

 c) Once your registered assets are depleted, sell your home, downsize and re-invest to generate enough cash-flow to last you until you die.

 

The problem with the “old-school” financial planning model is two-fold:

 

“Research has consistently shown that strategic uses of reverse mortgages can be used to improve a retiree’s financial situation, and that reverse mortgages generally provide more strategic benefits when used early in retirement as opposed to being used as a last resort.” – Jamie Hopkins, Forbes

In Canada, a reverse mortgage can be set-up to provide homeowners with a monthly draw out of the approved amount. For example: client is approved for $240,000 and decides to take $1000/month. This is deposited into the clients’ bank account over the next 20-years. Interest accumulates only on the amount drawn (i.e.: not on the full $ amount at the onset).

This strategy allows clients to draw down less income from their registered assets to support their retirement lifestyle. In turn, this can create some excellent tax savings, since home equity is non-taxable. Imagine lowering your nominal tax bracket by 5 – 10% each and every year over a 20 year period?! The tax savings can be huge.  You are also able to preserve your investable assets, which historically, can generate a higher rate of return when invested over a greater period of time.

 

At this point you are supposed to say: “This is too good to be true.” Go ahead, say it, and then call me – 604-787-1755.