Reverse mortgages have been the talk of the nation as many Canadians feel as though they lack sufficient funds for their retirement. In fact, studies have shown that over 50% of Canadians are concerned that they will outlive their retirement savings. Reverse mortgages are one possible solution to this issue, but they are not necessarily the best solution because of the high number of reverse mortgage scams that plague consumers. To help you navigate through what reverse mortgages are and the potential risks that come with them, keep reading.
What is a Reverse Mortgage?
A reverse mortgage is a form of financing that enables the borrower to get money from home equity without having to sell the property. A reverse mortgage is also commonly referred to as an equity release. Usually, the borrower can take out a particular percentage of the home’s current value. Borrowing maximums depend on various factors including age, property appraised value, and the lender.
Another unique characteristic of a reverse mortgage is that no payments are required until the loan is due. Typically, a reverse mortgage loan is due when the borrower moves out of the home, sells the property, or the borrower passes away.
A no-payment loan sounds fantastic, so what’s the catch? The catch is that interest still accrues on the loan. The longer the borrower goes without making payments, the more interest will accrue. If the borrower fails to pay the loan in a timely manner, the interest and principal could become so great that it could negatively impact the total value of your home.
Who Qualifies for a Reverse Mortgage?
There are two requirements to be eligible for a reverse mortgage, they are as follows:
- Be 55 years of age or older
- Own a home with positive equity
If someone else is on the title of your property, for example, a spouse, they must appear on the reverse mortgage application as well. In addition, all those on the title must meet the above conditions for a reverse mortgage.
Furthermore, the property in question must be your primary residence. If you own more than one house, your primary residence would be the one that you live out of for six months in a year or more.
Finally, if you have an outstanding mortgage on your home, you must pay it off when you get a reverse mortgage. Fortunately, you can use the funds from your reverse mortgage to pay off the remaining mortgage balance along with other outstanding debts against your property.
When is a Reverse Mortgage a Good Option?
For retired Canadians who are interested in tapping into their home equity
Watch Out For Reverse Mortgage Scams
Reverse mortgages are perfectly legal in the world of personal finance. Although not every lender will have your best interests at heart, many reverse mortgage lenders take advantage of individuals in desperate situations. Below are some of the most common reverse mortgage scams that all retired Canadians should be wary of.
Corrupt Service Providers
When choosing a reverse mortgage provider, you need to do your research and err on the side of caution. While a reverse mortgage provider may seem legitimate, there could be underlying issues that you don’t learn until it’s too late. For example, when you take out a reverse mortgage, part of the loan will go toward paying off any remaining debt from your first mortgage. A corrupt lender could keep that money and you could be left in debt without knowing right away.
Inappropriate Documentation Requests
Many reverse mortgage scammers deceive seniors by posing as legitimate, trustworthy lenders. These deceptive lenders may ask for sensitive documents or money stating that it is a requirement for approval. A real lender would never ask for this type of documentation prior to approval or money.
Property Title Transfer
In order to get approved for a reverse mortgage, you do not need to transfer the title of your property to your lender. If a reverse mortgage provider is adamant that this is a requirement for this type of financing, walk away.
When it comes to taking out any type of loan, there will be fees involved. Whether it’s legal fees, notary fees, or even loan origination fees. But, if you’re thinking about applying for a reverse mortgage and are interested in speaking with a reverse mortgage provider first, be on the lookout for information fees. If a reverse mortgage lender requires you to pay a set fee for educational or informative information, it is a scam.
Home Improvement Fraud
If a contractor, handyman, or construction company ever suggest that you take out a reverse mortgage to pay for their services, they likely do not have your best interests in mind. While this is not specifically a scam, it’s best not to trust a professional whose advice is not so professional.
Reverse Mortgage Alternatives
If the risks of a reverse mortgage seem too great to you, there are other options. During retirement, if you find yourself concerned about finances or in a monetary pinch, you can supplement your income by doing one of the following:
- Make Part of Your Home a Rental Space. Being a landlord may not have been a part of your retirement plans, but it is an excellent way to make some extra money every month.
- Home Equity Line of Credit. HELOC for short, this type of financing allows you to access 65% of the equity in your home while still keeping ownership. There is an income requirement for this type of financing, but if you have some form of income, even from investments, you should have no problem getting approved.
- Downsize. You can sell your home and use the proceeds to pay off the remainder of your mortgage and purchase a smaller property or rent instead. This strategy will leave you with some extra cash that you can use during your retirement.
The Bottom Line
At first glance, a reverse mortgage seems appealing and convenient. However, that doesn’t mean that they are always beneficial and scam free. As with every personal finance decision, it helps to consider your current situation and financial goals, even in retirement. So long as you make a knowledgeable and educated decision, avoiding a reserve mortgage scam should be easy.