Reverse Mortgage follow up
Not long after my last column about reverse mortgages went live I received a thoughtfully written email from a reader challenging several of the points I made in my article.
He raised concerns about the cons around reverse mortgages and said he felt that I wasn’t diving into the potential negative impacts of reverse mortgage products.
Most of the concerns boiled down to the erosion of equity in seniors’ most significant asset due to the compounding of interest over time. He felt that I didn’t show any calculations so people would not see the long-term cost of a reverse mortgage.
When I work with my reverse mortgage clients I show them projections that include the interest cost. What people may not consider is the appreciation in value of homes over time.
Reverse mortgage lenders don’t automatically go to the maximum allowable amount for every client (ie: “up to 55% of the value of the home”). Mortgage size is determined by the age of the client and the type and location of the home that they are in so as not to erode all of the equity in the home. Mortgages are done on a sliding scale so the younger they are the less equity clients have access to.
The other piece to understand is that not every client pulls the entire amount they are approved for upfront. I encourage my clients to only pull what they require at the time and to have the rest available for if and when they need it.
Initially I was not a huge fan of reverse mortgages for a lot of the reasons that he shared. However, I have many clients who are house rich with very limited income. People living on CPP and OAS can’t afford the basic necessities never mind any frills.
Which leads to another reason I see the value in reverse mortgages. Many of the clients I work with have overextended themselves using credit cards or personal lines of credit and are in the position that they are making the minimum payment on their credit facilities by applying for more credit cards or loans, which leads to a spiral of increasing balances month over month with no way to repay these debts.
Downsizing doesn’t always work because moving to a smaller home often means now they have a strata payment. Even if they downsize and have cash in the bank to cover living expenses, the end result is that they are still eroding that equity and now are not in the home they spent their lives in.
I’ve seen reverse mortgages impact seniors in positive ways that you can’t even imagine. I’ve had clients supporting their middle-aged children while not having money to buy groceries. I’ve worked with clients who have needed to renovate their homes for accessibility issues due to health concerns as they age. I’ve seen clients leverage the equity in their homes to buy vacation homes.
There are many types of clients who use reverse mortgages to achieve their financial goals. I do find that some of the loudest objections come from the families of clients. In these situations I first ask my clients if their families know the true extent of their financial distress.
Next I ask if they would like to include trusted family members in the conversation so that we can address any concerns so that everyone is on the same page.
Not all reverse mortgage clients are naïve. Many have already done their homework before they call.
