Reverse Mortgages

The rising popularity of reverse mortgages among Canadian seniors is driven by the financial strain many face due to inadequate savings and limited income from Old Age Security and the Canada Pension Plan. Reverse mortgages, available to homeowners over 55, allow borrowing up to 55% of home equity without income requirements, providing a crucial financial lifeline. Borrowers need not make payments until they sell the home or pass away, and the funds are tax-free, making them attractive for covering expenses like condo fees.

However, reverse mortgages have significant downsides. The debt grows over time, with interest rates currently around six percent, more than double that of a five-year mortgage. Over five years, the amount owed can increase by over 30%, compounded by substantial setup charges. This growing debt burden often means that estates must sell the property to repay the loan, potentially leaving nothing for heirs.

The increasing use of reverse mortgages, growing by 25% annually compared to a five percent rise in traditional mortgage debt, poses long-term risks. Financial institutions may foreclose on properties when estates can't cover the debt, potentially flooding the market with homes and driving down property values.

As an alternative, a home equity line of credit (HELOC) offers lower interest rates and the flexibility of no immediate increase in debt, making it a more sustainable option for some homeowners. While reverse mortgages can provide necessary funds in the short term, their long-term implications on net worth and the ability to leave a legacy for children are significant considerations.