The 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
Below, we are going to discuss each of these three common misconceptions in more detail.
1. The Bank Owns Your Home
More than 50% of Canadian homeowners who are over 65 years of age, believes the bank will own their home once they have taken out a reverse mortgage. As experienced mortgage brokers, we can assure you that this is not true! With a reverse mortgage, just as with any other mortgage product, we will simply register our position on the title of the home. The largest difference between a reverse mortgage and most other mortgage instruments is also its main benefit – the flexibility of no longer having to make principal and interest payments on your mortgage loan.
2. Your Estate Can Owe More Than Your Home
Most mortgages in Canada are considered full recourse debt, which means the lender of the loan is allowed to seek compensation for the full value of the loan, regardless of the current value of the home. A reverse mortgage, on the other hand, does not fall into this category and is considered a non-recourse debt. This means that if the borrower defaults on the loan or the last homeowner passes away and the reverse mortgage becomes due, the borrower or the homeowner’s estate will not be responsible for repaying the entire loan. They will only be responsible for paying back enough to cover the fair market value of the home.
3. The Best Time to Take a Reverse Mortgage is at the End of Your Retirement
Don’t make the common mistake of waiting until the end of your retirement to take a reverse mortgage. The method of financial planning that made this recommendation should be left in the past with other “old-school” financial planning strategies.
Most Canadians, including those that aren’t receiving a nice government pension, are still following this old-fashioned mentality and plan their finances through cash-flows like this:
a) Exhaust non-taxable assets in order to help supplement retirement income
b) After these assets have been depleted, exhaust registered assets (RSP/RIF) to help supplement retirement income
c) After these assets have also been depleted, sell the family home, downsize, and re-invest to generate enough of a cash-flow to last until you pass away
There are a couple problems with this way of financial planning:
1. According to CBC News, the vast majority of senior Canadians do not have plans to sell their home
2. If you wait until the end of your retirement to take out a reverse mortgage, you are letting a huge tax-saving opportunity pass you by!
Canadian homeowners can set-up their reverse mortgage to provide them with regular withdrawals of an approved amount. For example, let’s say a homeowner is approved for an amount of $240,000 and they decide to withdraw $1000 a month. The $800 will be deposited into the bank account of their choosing over the next 20 years. They will begin accumulating interest right away on this money, but only on the amount that is withdrawn, not on the initial $240,000.
This strategy of financial planning is far more beneficial than exhausting all registered assets to support a retirement lifestyle. By using the funds from a reverse mortgage to supplement retirement income, other assets can be saved for a longer period of time. Home equity is also non-taxable, so this also helps save money that would be paid in taxes.
In conclusion, both Canada and the United States have populations that are aging and members of both populations are regularly falling victim to these common misconceptions about reverse mortgages. By educating themselves about these misconceptions, homeowners are better prepared to balance their finances and lifestyle as they entre retirement and wish to stay in their family home.
Give Cashin Mortgages a call today if you or a loved one could benefit from taking out a reverse mortgage.
Source: www.homequitybank.ca/roland-ma
