When a Reverse Mortgage Does Not Make Sense

Reverse mortgages make sense when they are taken out for specific reasons; filling gaps in retirement savings, providing for a better quality of life in retirement and many more. But there are some situations where reverse mortgages don’t make sense – and you have reverse mortgage brokers and your legal team on your side to help you make that decision.

Unreasonable requests from family members

Roland Mackintosh is a business development manager at HomEquity Bank, the company which oversees the CHIP Home Income Plan. In a recent article at Mortgage Broker News, he described a situation where a 65-year old widow applied for a reverse mortgage on her $1.5 Million home and was approved, based on her income and the value of her home. However, the reason that the widow applied for the reverse mortgage raised alarm bells with her broker.

Apparently, a family member had asked the widow for a $495,000 loan to help support their restaurant business that was failing. After hearing advice both from the broker and her lawyer, the widow decided against taking out the reverse mortgage.

This isn’t to say that reverse mortgages can’t be taken out to help family members; applicants who are financially comfortable but want to help out an adult child with a wedding, down payment for a house, or other life events is a fairly common scenario. Unlike other forms of credit, there are no monthly payments with a reverse mortgage, and the full amount is only due when the home is sold. Plus, you can only take out 50% of your home’s equity, so there will be funds left when your home is sold.

What should be avoided is a scenario like the widow’s where good money is being thrown after bad. The restaurant was failing, and even if it was a request for an initial investment into a restaurant business, it would still need to be properly vetted to gauge the viability of the investment. A lawyer, financial planner or other professional would offer the best advice in this regard.

Other scenarios to avoid when taking out a reverse mortgage

As a parent, you naturally want to give your children everything that you can. But the tendency to support adult children more than usual is draining the retirement accounts and savings of Canadian baby boomers. It’s not unusual now for children in their twenties to be living at home, given the higher costs of living. Rent in many major cities, and even smaller towns, is unaffordable without some parental support for young adults who are at the bottom of the wage ladder.

However, this support can subtract significantly from retirement savings and make the young adult dependant on a certain level of support. When either of these things start to happen, it’s necessary to draw the line by either charging an adult child rent or withdrawing the amount of support that is impacting retirement savings. Essentially, you shouldn’t be taking out a reverse mortgage to support an adult child who has the means to make a living for themselves.

If you do want to consider a reverse mortgage, contact Horizon Equity. We’re brokers for the CHIP Home Income Plan and can offer you professional advice on the viability of a reverse mortgage for your particular situation.