# Thoughts on reverse mortgages?



## indexxx (Oct 31, 2011)

I was wondering what some informed opinions are on RMs in Canada. Here's the situation: my dad and his wife are retired, living in a condo in Edmonton that I believe they own outright, or very darn close to it, having bought it over 30 years ago on two incomes. My dad is now 80, she is about 70. However, he was not in a position to build any retirement/pension aside from OAS, as he was a commissioned salesman. She likely has a small pension, but probably not too much (we don't talk specifics of finances in my family- just not the way it is.)

So what's going on is that they are a bit hurting for income, and I am unfortunately not in a position to offer support, saddled with my own mortgage at a rather average salary in BC. Clearly he is not in a position to work at his age, although his health is very good and he is extremely active. He has no real ability to generate income through hobbies, home business, etc. Although highly intelligent, he is also completely financially illiterate from an investing etc standpoint (I attempted to get him into some retirement funds 30 years ago, but he wasn't having it).

He's even talked about selling their condo. Would a reverse mortgage be a reasonable option for them?

Thank you for your input.


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## naysmitj (Sep 16, 2014)

How many years will they really continue to live in the condo? The reason I ask, is that reverse mortgages are a relatively expensive form of loan and over a 5 year period could drain a lot of his equity. Selling and moving to a rental or retirement home may be a better option, as they preserve the equity and control the costs. Short term, to get through to the best time of the year to sell and move, avoiding a winter move in Edmonton, a line of credit based on equity, is probably a feasible option.


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## birdman (Feb 12, 2013)

I'm not experienced in them or how they work but what about a sale/leaseback. This would be dependent on the value of the property and return to the new purchaser but if the numbers did happen to come together it could give them the cash and at the same time they could reside in their current residence. Looked at doing one when I was working years ago but can't recall all the details except that would free capital and crystalize equity. I also don't have any idea about the market in Edmonton. Just a thought.


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## fraser (May 15, 2010)

I looked into it briefly for a relative. The one issue that I saw was the current imputed interest rate. As I recall it was five percent. Far too high. Might be better off selling and then renting. Renting would reduce the exposure to condo assessments. It is also a good way to potentially move into an assisted living environment at some point.

Read a few financial articles on the web. Each one had the same issue...the imputed interest rate is high. At least 2 points higher than market.


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## Just a Guy (Mar 27, 2012)

Because of the power of compound interest, reverse mortgages generally allow the lenders to acquire properties at 40 cents on the dollar. They usually lend the owner a maximum of 40%, as the interest accumulates quickly, and compounds to boot (since there are no payments), most people wind up with no equity in a relatively short time (say 10 years). While it may give the owner temporary relief, it leaves most estates very small considering the lifetime it took to generate the money the first time.

To me, it ranks up there with payday loans and other legal scams.


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## Userkare (Nov 17, 2014)

Just a Guy said:


> Because of the power of compound interest, reverse mortgages generally allow the lenders to acquire properties at 40 cents on the dollar. They usually lend the owner a maximum of 40%, as the interest accumulates quickly, and compounds to boot (since there are no payments), most people wind up with no equity in a relatively short time (say 10 years). While it may give the owner temporary relief, it leaves most estates very small considering the lifetime it took to generate the money the first time.
> 
> To me, it ranks up there with payday loans and other legal scams.


Wouldn't the 40% be of assessed value at the time the RM was signed? In the subsequent years, the value of the property might increase at a rate higher than the interest. In that case, you're borrowing against the increase in value of your home. OTOH, there could be a windmill farm, or organic composting facility built across the road. In that case you're getting free money b/c now your house isn't even worth 40% of what it was when the RM was signed. :biggrin:

I, personally, wouldn't use an RM unless you didn't want to leave anything to your kids; and only then as a last resort. Downsizing, or moving to a less expensive community, would be my first options.


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## tygrus (Mar 13, 2012)

Do people even understand what a reverse mortgage is? Its basically a lender signing you up to a bet that you will die before he pays out the value of your house. Its a scam and I cannot believe its even legal. These companies have loads and loads of mortality tables and know your dad probably might only have another 5 years and there is a good chance he will be on assisted living somewhere at the end of his life. Your mom has a bit longer likely.

If you want income from your home, get a rocking heloc and invest it. No more risky than a reverse mortgage and you can be out of it in an afternoon if you want.

Its been my experience that people who are too conservative with their money usually run out.


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## OptsyEagle (Nov 29, 2009)

A reverse mortgage is like a black hole that sucks the equity out of a house very, very quickly. Now the guarantee ensures that your parents will not be forced to sell the house, but let's face it. Everyone eventually has to sell their house. If they need to go to a nursing home the house will be sold, the reverse mortgage will be paid off and there may not be very much left.

The other problem is trying to use a RM to get income. They don't just lend your parents a few hundred every month. They lend your parents 40% of the value of the home, in a lump sum, and then send them to a finance company with that money to buy an annuity that will pay them a few hundred a month. That may not seem like an issue, but think about it. If the RM company was the same as the annuity company (sometimes it is, but the mechanics are the same in any event) then they are not even lending your parents the 40%...just charging them interest for it. Think about it. Let's say 40% is $100,000. They write up a RM, go into their vault and hand your Dad $100,000, with a 5% interest rate. They then write up an annuity, at which time your Dad hands them back the $100,000. They put it right back into their vault again, and pay your Dad about 2% interest by way of small monthly payments, that are a blend of principle and interest.

Talk about a great business. 3% interest rate spread and you don't even have to lend out any money.

That being said, the better option is simply to open a home equity line of credit and use it to fund your required expenses. The interest rate on this would be much smaller and it is only charged on the monthly amounts needed in retirement. It is then subtracted from the value of the home when it is eventually sold. The main downside to this is that there will not be a guarantee that it can continue forever, and one has to be careful managing it. The upside is that it can go up to around 75% of the value of the house and the interest that is charged is only on the small monthly payments taken. Therefore is sucks the equity at a much, much slower rate.


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## indexxx (Oct 31, 2011)

Great answers everyone. Good detail Optsy- thanks.


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## indexxx (Oct 31, 2011)

one thought on a HELOC is if they can't qualify due to low income.


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## TomB19 (Sep 24, 2015)

I've looked into this and can see what others are saying, with regard to reverse mortgages being a scam.

Do you have the ability to purchase your father's condo and rent it back to him? It may not be as difficult as you think. You buy it, amortize it over 30 years, and charge your father rent equal to the payment, condo fees, and insurance.

At 80 years old, he isn't likely to be there in 10 years so he will still have some money left. The condo should appreciate a little in that time. I assume if he is 80 and broke, he's not doing any DIY or renovations but it should still be OK.

When your father moves into a home, you can paint the condo, perhaps a few light repairs, and sell it. It might be a nice investment for both of you and he doesn't have to move.


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## indexxx (Oct 31, 2011)

I would like to do this, however I just bought my own condo in February and don't have the money to do so.


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## TomB19 (Sep 24, 2015)

Understood. Sometimes it simply isn't possible.

You might be surprised how easy it is to do, though. Perhaps a family member can help you? Perhaps your Dad can help you with what he has left if he knows he'll get it back when the deal goes through? Perhaps your Dad can hang on for a year or two while you accumulate a down payment?

If it's a matter of needing a lot of money overnight, that can be impossible for all but a really wealthy person but if you have a bit of time, I wouldn't give up.

I have a mortgage brokered with Monster Mortgage at 2.15% and they amortized it over 30 years. The payment is effortless and the house is cash flowing like crazy. It was 25% down (relatively easy for us because we own other cash flowing homes). The interest rate would be a bit higher for someone who needs 20% down or perhaps has a worse credit rating. Remember, having a good credit rating doesn't just mean not defaulting. It means building up credit experience so don't be offended if you're a responsible person and you're not at the top of the rating.

You might be able to re-mortgage your condo at a lower rate and maybe even squeeze some cash out of it.

If you purchased in February, it was probably appraised in January or February using comparables from November through January. That's the off-season for Canadian real estate. You bought at a great time.

Now it's Ocrober so an appraisal, if done immediately, would be done with July~Sept comparables. A current appraisal will be down from spring peak pricing but you might still bump up your home value enough that a re-mortgage could net you a few percent higher mortgage. By the way, if you've been thinking of painting or putting up some shelving, do it before the appraisal, as long as the colours aren't too wacky. "Builder beige" is named as such for a reason. Neutral colours sell houses and increase property value. Replace all of those burned out lights. Clean the place. It all helps.

If you can wait until spring, re-mortgage next June. That's only eight months away. It's the blink of an eye in life terms. That's well into spring peak pricing when your condo will re-appraise at it's best.

Also, there are appraisers who are more "optimistic" than others so you might get more money out of your current place than you think. That will vary with your mortgage broker.

If you have enough equity and RRSP wealth, you could consider an RRSP 2nd mortgage. This would bring it's own overhead though, so it is extremely unlikely it would be worth it for the kind of money you are likely talking about.

Between a re-mortgage and saving money, you might be able to scrape enough. Consider taking on a room mate. Consider selling your car, if you have a newer vehicle.

Real estate requires big bites of investment and you can choke a bit. It will take sacrifice to make a deal like this happen. ... but when you're 80, you won't look back and regret a vehicle downgrade or having taken on a room-mate to help put together a down payment.

Keep in mind, a mortgage company considering the new mortgage on your father's place will require you to show the funds in your account 90 days out from the transaction. They might be OK if you're saving $1K per month and you're $2K short, 60 days out, but you will have to prove your ability to make the down payment.

When I first started, I threw some long bombs. Believe me, the first couple of transactions pinched. The biggest, and only significant, problem with rental real estate is finding a decent tenant. In fact, these days, I try to find the tenant first and then buy a home to suit but that isn't always possible. I assume your Father is a home run tenant.

It could be that this deal is yours to loose. I'd hate to see you shrug it off if you really want it and might have a chance to do it.

Whatever happens, best wishes to both yourself and your Dad.


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## TomB19 (Sep 24, 2015)

Back to your original post....

Reverse mortgage companies are vampires who will suck your Dad's financial blood. ... but if it allows him to keep his independence and live a more comfortable life, it might be worth it. I'd exhaust all other avenues first, though.


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## Just a Guy (Mar 27, 2012)

Tomb19's idea of buying the condo may not be as hard as you think. If your credit rating is good, you may qualify for a mortgage on the property (usually up to 80% if it's a "revenue" property).

How you technically arrange the "sale" of the property is up to you and your dad. He could "officially" gift you the downpayment of 20%, or unofficially "loan" it to you in exchange for a low rent until he moves out. The terms can be whatever you want or feel is fair.

As long as you don't have siblings (if you do, they could all chip in and be co-owners) who would gripe about the "inheritance factor", and you qualify for that mortgage, it should be very easy to do...

It's basically how I buy houses all the time, though modified because it's family in your case.


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## yyz (Aug 11, 2013)

I do agree that a RM is a bad idea having gone through this with my parents just over 1 year ago. After 6 years the $100k turned into $140k+. You also don't get the whole amount.You need to pay for a lawyer and an assessment on the property which in my parents case took the $100k down to about $98k right off the bat.
I will say that looking through the situation you do have an option to get a monthly "payment" from a RM so you don't take a lump sum and the interest would accumulate slower.But that to me would still be a last resort. You don't know how long your dad can remain independent and if they have to leave the house at some point then it's time to pay the piper.
Me,I moved my parents to what I consider a nice apartment and with what was left with the house proceeds invested most in fixed income with a few dividend paying stocks.Now it can help pay the bills and protect the capital remaining in case/when they need to move into a retirement home or facility.


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