In order to help older homeowners improve their finances in retirement, the reverse mortgage was introduced as a viable option for accessing home equity—yet despite strong financial regulations in Canada and the consumer protections built into the product, misinformation persists.
Let’s dispel the prevalent myths and misconceptions by shedding light on the truth about reverse mortgages.
Myth: The bank owns your home
One of the most common myths about the reverse mortgage in Canada is that the bank will own your home.
With a reverse mortgage, you unlock access to a portion of your home’s value in tax-free cash. Your home remains 100% yours, as long as you continue to meet your mortgage obligations, like paying your property taxes and home insurance, and keeping your home maintained.
In addition, a reverse mortgage comes with spousal survivor protection benefits. If you pass away during the course of your loan, your surviving spouse won’t need to requalify for the reverse mortgage, nor will they be forced out of the home by the bank.
Myth: If you have a conventional mortgage, you can't get a reverse mortgage
Many believe you won’t qualify for a reverse mortgage if you have an existing conventional mortgage, but a reverse mortgage is in fact a popular way to pay off that mortgage—allowing you to wipe out monthly mortgage payments for good and improve monthly cash flow.
Myth: A reverse mortgage is a financial tool of last resort
Reverse mortgages are booming among Canadian retirees. While some individuals may consider a reverse mortgage as a last resort, for many it can be their most logical choice.
Many use their reverse mortgage to pay off existing debt, like a conventional mortgage, credit cards, or lines of credit, or to renovate their home to better suit their needs as they age.
Others use it to enhance their retirement cash flow when savings or income may be limited. The tax-free funds provide peace of mind and flexibility that may not be possible with other financial solutions.
Myth: A reverse mortgage is risky—you'll end up owing more than the value of your home
The idea that you could owe more than the value of your home is a common belief, but it’s not the reality.
If you enter into a reverse mortgage, safeguards like the “no negative equity guarantee” ensure you’ll never owe more than the fair market value of your home, once you’re ready to leave it. This also means that should your home increase in value, the value is yours to keep, provided you’ve met your mortgage obligations.
Myth: Interest rates are high compared to conventional mortgage products
One of the more prevalent complaints about reverse mortgages are the higher interest rates when compared to conventional mortgages or home equity lines of credit.
It’s true that reverse mortgage interest rates are typically higher, but it’s a result of the risk taken on by the lender.
Reverse mortgages offer the benefit of not having to make monthly payments, so the lender must wait until the end of the life of the loan to get its money back. This means the lender takes on more risk, which is reflected in the higher rates.
It’s important to note that should you choose to go with a HELOC, your rate will typically be variable and should rates go up, so will your overall cost of borrowing. A reverse mortgage offers the convenience of fixed or variable options.
In Canada, Equitable Bank offers competitive reverse mortgage rates, and will even beat a lower posted rate for a comparable reverse mortgage.*
Myth: A home equity line of credit (HELOC) is the only financial solution for retirees
Unlike a reverse mortgage, a HELOC requires stricter income and credit score conditions to qualify. Monthly interest payments are also required, which isn’t ideal for retirees living on a fixed income.
With a reverse mortgage, qualifications are based on age, home value, property type, and location.
The primary difference between the two is a reverse mortgage doesn’t require you to make monthly payments, and the mortgage balance is only due when the last borrower moves, sells, passes away, or defaults.
The absence of regular mortgage payments, combined with a simpler qualification process compared to other products, can offer financial flexibility and peace of mind for many cash-strapped retirees.
To learn more, read our blog comparing the HELOC with a reverse mortgage.
Myth: A reverse mortgage will affect your Canadian Pension Plan (CPP) and Old Age Security (OAS) benefits
The cash released by a reverse mortgage is tax-free and thus not considered income, and does not affect your government benefits in any way.
Myth: You won’t have anything to leave for your heirs
An important safeguard that comes with a reverse mortgage is the “no negative equity guarantee,” which ensures you’ll never owe more than the value of your home.
When the reverse mortgage is paid off, you or your heirs retain the equity left in your home. Historically, home values have risen over the life of many reverse mortgages, which means the remaining equity has been considerable for some. At any time, the remaining equity will depend on the difference between the home’s current value and the amount owing on the reverse mortgage.
Myth: You’re not old enough to qualify for a reverse mortgage
A reverse mortgage is a viable option for financial planning, no matter your stage in life. As it is a product designed for retirees, you must be 55 years of age or older in order to qualify in Canada.
The older you are when you apply, the more tax-free cash you can access—up to a maximum of 59% of your home’s value.
The truth about reverse mortgages
When planning for retirement, it’s important to weigh all financial products at your disposal. This includes gaining a thorough understanding of the reverse mortgage, and clearing up the common misconceptions around it.
An informed financial decision should involve doing your research to gain a thorough understanding of a product’s terms and conditions, seeking professional advice, and ensuring the choice aligns with your goals and needs.
If right for you, a reverse mortgage can be a powerful tool for enhancing retirement income and maintaining control over your finances.