In a previous blog, we addressed the increasing popularity of reverse mortgages among Canadian seniors. Given the heated housing market in Ontario, as well as the increasing cost of living, many seniors are driven to applying for reverse mortgages, as it is often presented as an alternative solution to supplement retirement income.

Reverse mortgages can be a great solution in some situations. A reverse mortgage is a type of loan that allows homeowners aged 55 or older to borrow up to 55% of the current value of their home. Unlike a traditional mortgage, where homeowners make regular payments to the lender, a reverse mortgage allows homeowners to receive funds from the lender instead, either by taking the money as a one-time lump sum, or taking a potion of the loan upfront, and spreading the remaining payments over time. The loan is typically repaid when the homeowner sells the property, moves out, or passes away.

This seemingly easy access to funds does make this a desirable solution for many seniors. However, it is important to consider the potential drawbacks and limitations of reverse mortgages, especially when considering them in the context of your estate planning strategy.

Impact on Estate Administration
One of the downsides of a reverse mortgage is its potential impact on the value of an estate. As you access the equity in your home through a reverse mortgage, the loan balance gradually increases over time. This means that the remaining equity in your property, which would have otherwise been passed down to your beneficiaries, would be reduced. Depending on the terms of the reverse mortgage, this reduction could be substantial, leaving fewer assets to be distributed upon your passing. This can be particularly impactful on estates where the house is the biggest, or the only asset.

The timing of the reverse mortgage also needs to be considered. While it is prudent to update your Will every few years, or at least after major life events, many people fail to do that. This can result in conflicting interpretations of the deceased’s testamentary wishes, where the deceased wished to leave a presumably mortgage-free property to their beneficiaries in their Will, but did not provide for proper instructions for dealing with the property that was now saddled with significant debt. This can lead to confusion during the estate administration process, and even disputes among beneficiaries.

Another important consideration is repayment of the reverse mortgage. If the trigger for the loan repayment is the death of the homeowner, most lenders would allow anywhere between 3 to 12 months for the reverse mortgage to be repaid. However, in some cases, the time it takes to finalize the administration of the estate can take longer than the time allowed to repay the reverse mortgage. This can create the risk that the property will be foreclosed on by the lender.

Interest Rates
Another significant drawback of these reverse mortgages is that they often come with higher interest rates and fees, compared to traditional mortgages. While these costs can be covered through the loan itself, they can significantly eat into the equity of your home. Additionally, the interest on the loan accumulates over time, further reducing the value of your estate.

Possible Negative Equity
In some cases, the value of your home may decline due to unpredictable trends in the real estate market, leading to negative equity in a reverse mortgage. Negative equity occurs when the outstanding loan balance exceeds the value of your property. If you pass away or decide to sell the home, this negative equity could result in a financial burden for your estate or surviving family members.

While reverse mortgages can provide financial relief and an additional income stream, it is essential to weigh the potential downsides before incorporating them into your estate planning strategy. Before opting for a reverse mortgage, consult with a financial advisor or an estate planning professional who can help assess your specific circumstances and explore alternative options that may better align with your financial goals.

Thanks for reading!

Margarita Grup