When does a reverse mortgage not make sense?

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Brokers are increasingly comfortable recommending reverse mortgages; but the truth is, not every client should get a reverse mortgage.

For reasons such as emergencies, home renovations, improving their lifestyle and even to alleviate the stress of debt through debt consolidation, a reverse mortgage makes sense, says Roland Mackintosh, a business development manager at HomEquity Bank; but in the reverse mortgage industry in Canada, people often question whether the product makes sense for their situation.

“At HomEquity Bank, the provider of CHIP Reverse Mortgages in Canada, clients are often asked the question ‘What is the purpose of your loan?’” says Mackintosh. “In other words, ‘what do you need the money for?’ HomEquity Bank makes sure that a customer is well aware of the loan they are taking out and also that a Reverse Mortgage makes the most sense for their situation.”

There can be situations where a BDM meets with a client and, after speaking with them, advises them against a reverse mortgage.

“People often forget that reverse mortgages are a huge responsibility from a monetary standpoint and if it just doesn’t make sense for the customer,” says Mackintosh. “I would honestly tell them that I don’t recommend it.”

Mackintosh cites the example of when he met with a customer where a reverse mortgage didn’t make sense:
-    Client is 65 years old, a recent widow, and owns a very nice $1.5M home in Oakville, Ont.;
-    Annual income of $34,000, $200,000 RSP, 4 children, 6 grandchildren;
-    She was approved for a $495,000 CHIP reverse mortgage based solely on her age & home value; and
-    The purpose of the loan: “to lend to her son to support his failing restaurant business.”
 
While it is nice to be able to help out your kids, Mackintosh asks if it really make sense to use a $495,000 reverse mortgage to “lend” to a family member and support a failing business?

“On one hand, the restaurant may need a capital injection and turn itself completely around (think Gordon Ramsey’s Kitchen Nightmares),” says Mackintosh. “On the other hand, if it fails, how will the son repay the $495,000 that he’s borrowed? In this scenario, the mom is now stuck with a reverse mortgage that is eroding the equity in her home.”

The future home appreciation may take care of the interest, but it’s not guaranteed to, adds Mackintosh – especially if she downsizes during a down-turn in the housing market.

“Any loan, line of credit, mortgage or reverse mortgage comes with risk,” he says. “And the use of funds is critical to determine if borrowing money makes sense.”

In this case, it clearly did not. And after advice from Mackintosh, her financial planner and her lawyer, the mom decided not to lend her son the $495,000. 
 
  • Cheryl Batke on 2015-07-31 9:53:29 PM

    Reverse mortgages do not make sense for everyone and that is one of the reasons all applying are required to get Independent Legal counselling as well as the advice from their broker.

  • Omer Quenneville on 2015-08-01 8:11:44 AM

    While it is good to have the option on the table for a reverse mortgage, it is usually only a good idea after all other options have been exhausted.

  • Ross Kay on 2015-08-03 3:23:32 PM

    Equity Management in residential real estate is currently Canada's #1 Risk to the economy as it is not being proactively mitigated when it can fully be so today.

    This article exemplifies the problem. Assuming this lady is mortgage free, she has 88% of her retirement assets contained in residential real estate. My own clients had over 3 billion tied up this way and since most are under 65 reverse mortgages are too limiting. Alternative solutions were needed.

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