Reverse Mortgages are mortgages available to homeowners over 55 and can provide up to 55% of the value of your home. No payments are required, and the mortgage isn’t due until sale of the home or death.
Critics of the Reverse Mortgage most often cite the “high” interest rate as the major deterrent of the program with “statistics” such as:
“HomeEquity Bank and Equitable Bank charge 5.74 per cent for a five-year fixed mortgage. Conventional five-year fixed mortgages are currently being offered online for as low as 2.4 per cent.
This is not a valid comparison. Let’s compare apples to apples not apples to oranges.
2.4% is the best rate being offered by banks for a 5 year, high-ratio, variable rate, insured mortgage to income qualified borrowers. This is not a product the majority of seniors come even close to qualifying for. These mortgages are based on income and are underwritten based on the stress test rate (currently 5.19%) and debt service ratios.
A typical retired senior couple with only CPP and OAS income of approximately $3,000 a month will only qualify for around $100,000. For most homeowners, particularly in Vancouver or Toronto, this would be a very low ratio mortgage. This mortgage would require monthly payments and would be due at the end of its term and may not be renewed, at the discretion of the lender.
Most seniors do not qualify for conventional financing. Their more likely option is in the non-income qualified private market. The best rate available today would be 5.99% with a 2% lender fee and a one-year term. Monthly payments are required and at the end of the term the mortgage can usually be renewed but with a renewal fee being charged. This is the valid real-world interest rate comparison that should be made.
Something most people don’t know is that interest on a Reverse Mortgage can be paid monthly without a penalty making them a very cost-effective alternative to private financing for those that are able to make monthly payments and, if you decide to, you can stop making the payments any time, something a conventional lender would be very upset with.