In Canada, Reverse Mortgages are often recommended to clients and customers who are of a certain age, have a home they want to stay living in, and are in need of cash for reasons such as emergencies, home renovations, improving their lifestyle and even to alleviate the stress of debt through debt consolidation. But in the Reverse Mortgage industry in Canada, people often question the product as to whether it makes sense for their situation. The truth is, not every client should get a Reverse Mortgage. At HomEquity Bank, the provider of CHIP Reverse Mortgages in Canada, clients are often asked the question “What is the purpose of your loan?” In other words, what do you need the money for? HomEquity Bank makes sure that a customer is well aware of the loan they are taking out and also that a Reverse Mortgage makes the most sense for their situation.
There can be situations where a Business Development Manager (BDM) meets with a client and after speaking with them, a reverse mortgage is not recommended. People often forget that Reverse Mortgages are a huge responsibility on a monetary standpoint and if it just doesn’t make sense for the customer, I would honestly tell them that I don’t recommend it. Recently, I met with a customer where a reverse mortgage didn’t make sense:
- Client is 65 years old, a recent widow, and owns a very nice $1.5M home in Oakville, ON
- Annual income of $34,000, $200,000 RSP, 4 children, 6 grandchildren
- She was approved for a $495,000 CHIP reverse mortgage based solely on her age & home value
- The purpose of the loan: “to lend to her son to support his failing restaurant business”
While it is nice to be able to help out your kids, does it really make sense to use a $495,000 reverse mortgage to “lend” to a family member and support a failing business? On one hand, the restaurant may need a capital injection and turn itself completely around (think Gordon Ramsey’s Kitchen Nightmares!). On the other hand, if it fails, how will the son repay the $495,000 that he’s borrowed? In this scenario, the mom is now stuck with a reverse mortgage that is eroding the equity in her home. Sure, future home appreciation may take care of the interest, but it’s not guaranteed to, especially if she downsizes during a down-turn in the housing market.
Any loan, line of credit, mortgage or reverse mortgage comes with risk. And the use of funds is critical to determine if borrowing money makes sense. In this case, it clearly did not. After advice from her mortgage lender, her financial planner and her lawyer, the mom decided not to lend her son the $495,000.
Mortgage professionals at Dominion Lending Centres are experienced and well trained to be able to decipher between a good or bad fit for a reverse mortgage – feel free to contact us anytime.
Thanks to my DLC colleague Roland Mackintosh for this article.