What is every Canadian family’s dream? To pay off their mortgage and be debt free. Unfortunately the trends are flying in the face of this logic as more and more Canadians are accessing their equity in retirement through reverse mortgages. For better or worse, this mortgage product is here to stay and needs to be explored to see if it is the right fit for you.
What is a Reverse Mortgage?
A conventional mortgage is where you borrow a lump sum and pay it back over a set period of time. In contrast, the reverse mortgage is where you borrow an amount in total or in stages that you need but do not make payments. Sounds great doesn’t it? The only issue is that as a result, the interest charged over time is added to the loan balance, and the mortgage steadily grows. One thing to note is this a product only available to those 55 years old and older and any other debts secured against your home either need to be paid from the reverse mortgage or postponed to second position behind the reverse mortgage which may be a hassle. There are many details in the reverse mortgage structure that are of concern and “Georges and Fran” are going to show us why.
Reverse Mortgage Interest Rates in Barrie
Our stressed out seniors entered my Barrie Mortgage Brokerage with a crease in their brow and questions on their lips. Being of the frugal generation, Georges and Fran were not in the habit of borrowing frivolously however their circumstances required 50K asap. They were intrigued by the reverse mortgage as it is promoted online as an easy and stress free solution. What they were not told is that typically the interest rates on this mortgage product are up to 2X more. Today they could get a line of credit against their property for 3.5% and a five year reverse mortgage product was offered to them at 5.5%. Although this only increases their payment by $55/month, for seniors living on fixed income it can make all the difference.
Compound Interest in the Bank’s Favour
As I brought to light the details of what the reverse mortgage provides, Georges and Fran began to become more engaged. I then explained a more difficult concept that is another disadvantage of the reverse mortgage. Compound interest in the bank’s favour. The unfortunate reality is that most Canadians do not understand the power of compound interest and therefore do not put it to good use toward their retirement. Not the case for the banks. They will take people who are at the most vulnerable point in their lives and fully leverage compounding the interest against them. Case in point our couple. If they were to borrow the 50K from their equity in a reverse mortgage, in year two they would owe the bank 50K plus the interest due or approx. $2,750 for a total new mortgage owing of $52,750. The part the bank loves is that now the 5.5% interest rate is charged on the total new amount owing. As you can see, by year 5 our couple’s equity is very dramatically being eroded by this process.
The High Price of a Barrie Reverse Mortgage
My new clients were quite perturbed although relieved that they had come to get a second opinion on their options. As I went over the final aspect of the reverse mortgage, the picture became quite clear to Georges and Fran. Because reverse mortgages in Canada are not very popular, there are still very few providers of this type of mortgage product. Whenever there is a lack of competition in the marketplace, the provider can impose unreasonable costs and this case is no different. On top of the regular costs of a conventional mortgage (appraisal and lawyer), a reverse mortgage requires ILA or independent legal advice which ensures you are making a sound decision. What was a concern to my clients was that they could also face stiff penalties if they were to decide to pay back the mortgage before the term was complete. These range from 11 months of interest in the first year down to four months of interest in the third year. A conventional mortgage has as its cornerstone a 3 month interest penalty. For our couple, that would mean a potential $2,500 penalty or 5% of the total loan. Ouch!
Barrie Seniors Reverse Mortgage Delight
Now that our couple is aware of the realities of their situation, here was their answer. I found them a conventional mortgage for the 50K they needed. We secured today’s best interest rates as they had an excellent pension and their credit was sound. The lender I connected them with offered the option of a prepaid mortgage where the first year of the term would not require payments as it came out of the principle of the loan before they received the proceeds. We also added the feature of having their property taxes taken care of as part of the prepayment which for Georges and Fran was a great relief. Here was a Barrie mortgage scenario that would truly “reverse” their fortune.
Be aware of the way reverse mortgages are marketed. To avoid high interest rates, negative compound interest, and high potential penalties against you, take the time to become educated of the pros and cons of every mortgage product available to you. For a tailored mortgage product fit to your needs like an glove, let’s connect to get all of your questions answered.