A look at reverse mortgage horror stories
It’s not hard to find reverse mortgage horror stories on the internet. But are these stories legitimate? Or are they just the result of people making poor financial decisions and struggling to accept the consequences? Keep reading to find out.
An overview of reverse mortgage horror stories
In Canada, reverse mortgages let you borrow up to 55% of your home’s current value. Unlike other types of home equity borrowing that require monthly repayments, a reverse mortgage only comes due when:
- you move out of your home
- you sell your home
- everyone on your house’s title dies
- you default on your reverse mortgage
Many reverse mortgage horror stories revolve around that last point. However, defaulting on a reverse mortgage and losing your home as a result is both rare and difficult. Additionally, as you’ll see next, many of the most oft-cited reverse mortgage “horror stories” are more nuanced than they initially appear.
A closer look at the most viral reverse mortgage “horror story”
One of the most viral reverse mortgage horror stories online concerns an elderly Alabama woman who had her home foreclosed on because her lender deemed the house unoccupied. The story is especially sympathetic since the woman was dealing with her husband’s recent death and the demise of their family restaurant amid the reverse mortgage drama.
Why this “horror story” is misleading
The lender’s inspector visited the vacant restaurant next door rather than the woman’s home, which she was still very much living in.
This is an extremely atypical situation and the woman eventually received significant compensation in court since the company was grossly negligent. In other words, the flaw lay with the reverse mortgage provider’s actions rather than the type of loan itself.
Unpacking another reverse mortgage “horror story”
Another commonly-cited reverse mortgage horror story concerns a Florida woman who reportedly lost her home after defaulting on a loan.
Why this “horror story” is misleading
The woman in question took out a reverse mortgage to cover the cost of home renovations. She lost the money when a fraudulent contractor vanished with it. Subsequently, the woman fell ill and was unable to keep up with her home insurance premiums, property taxes, and homeowner’s association fees. Her reverse mortgage went into default and she lost her home.
There’s no denying the incredibly unfortunate nature of this situation. However, the reality of any loan – whether it be a traditional mortgage or personal line of credit – is that going into default has dire consequences.
Reverse mortgage horror stories are rare in Canada
Most of the cautionary tales you read concerning reverse mortgages involve American homeowners and lenders rather than Canadian ones. This is no coincidence.
Canadian lenders are more stable and ethical
As we saw during the 2008 financial crisis, mortgage lenders in Canada operate with much more restraint than their American counterparts.
The liberal nature of mortgage lending in America led to staggering numbers of bank failures and foreclosures on homes people really couldn’t afford to begin with. Canada, meanwhile, did not experience a full-scale housing crisis. No banks failed.
This has actually been a recurring theme in Canada, as discussed in a report titled “Why Didn’t Canada Have a Banking Crisis in 2008 (or in 1930, or 1907, or…).”
The authors highlighted the diversified and “robust” nature of Canada’s banking system in contrast with America’s “fragmented” situation.
Additionally, critics of reverse mortgages typically take aim at the way in which American lenders target already-struggling borrowers. In the same way nobody called for an end to mortgages following the 2008 crisis, critics are not against the idea of reverse mortgages as a whole – just the seemingly predatory practices of lenders in the United States.
This is why you don’t hear nearly as much of an outcry about reverse mortgages in Canada, even though the sector has been growing by a staggering 28% annually.
Closing costs on reverse mortgages in America are much higher
Another major difference between reverse mortgages in Canada and the United States is that lenders in the latter nation charge much higher fees, including ongoing service charges borrowers often don’t find out about until they’ve signed on the dotted line.
Canadian lenders, meanwhile, charge much more reasonable fees and are required to be transparent about them.
The reverse mortgage market in America is more cutthroat
In Canada, there are only two reverse mortgage lenders: HomeEquity Bank and Equitable Bank.
By contrast, America has countless reverse mortgage lenders. Thanks to a legislative repeal in the 1990s, these retail banks are allowed to sell their mortgages as investments. This acts as an incentive to issue large numbers of reverse mortgages, assets backed by which are ultimately gobbled up by investors.
Canada, meanwhile, does not have a market for private mortgage-backed securities. In other words, lenders are not rushing to issue reverse mortgages and boost their share prices. Consequently, they’re not competing with hordes of other banks attempting to do the same thing.
This is a large part of why Canadian banks emerged from the 2008 crisis unscathed. They were never – and almost certainly never will be, due to Canada’s strong consumer protections – incentivized to issue loans no matter the cost.
Reverse nortgages in Canada come with common-sense protections built-In
Before 2014, reverse mortgage lenders in the United States only required that one borrower on the home’s title be above the age of 62. In other words, a 62-year-old married to a 55-year-old could’ve gotten a reverse mortgage on their jointly-owned property.
If the 62-year-old passed away, however, the reverse mortgage balance would’ve been due immediately. This is an alarming reality many reverse mortgage borrowers found themselves living in, which produced many of the reverse mortgage horror stories you read about today.
However, this was never the case in Canada. Every single owner on a property’s title has always been required to be above the age of 55, which means no single person’s death can trigger a loan default.
Common myths about reverse mortgages
Discussions of why a reverse mortgage is bad typically revolve around a few common misconceptions concerning the loans. Here’s a rundown.
Myth #1: The bank owns your home
One of the most common reverse mortgage myths is that the bank immediately owns your home. This is perhaps due to the fact that you don’t have to make regular payments on the loan, which sounds too good to be true for many people.
There’s no catch here, though. You own your home, which means the bank can’t force you to sell or do anything other than what you’d already do as a responsible homeowner (i.e. paying property taxes, maintaining insurance as is standard when you have a lien against your property).
Myth #2: It’s possible to end up owing more than your home is worth
This myth exists in large part because many people assume interest can simply keep building on their reverse mortgage indefinitely.
On the contrary, Canadian reverse mortgages typically come with a guarantee that – as long as borrowers keep up with their obligations, which they’d be doing anyway as responsible property owners – you’ll never end up owing more than your home is worth.
In fact, Canadian reverse mortgage borrowers typically pay off their loan with more than 50% equity to spare.
Myth #3: Reverse mortgages are a nightmare for heirs
Here’s another misconception that arises due to a fear many older homeowners have of leaving a tangled legal and financial mess for their heirs.
Refer to the last point; most reverse mortgages end with borrowers and their families retaining well over 50% equity in the home. This still amounts to a substantial inheritance.
Myth #4: Your children won’t be able to inherit your home
Many people mistakenly believe reverse mortgages end with the borrower’s home being sold by the bank for repayment. This simply isn’t true, either. Your descendants can pay off the loan however they’d like. Selling the property is just one option. If they have enough cash, they can use that instead and retain ownership of the home.
Additionally, heirs to a property on which a reverse mortgage exists have 180 days (six months) to settle the loan following your death.
Myth #5: reverse mortgages are only for people down on their luck who have no other options
Reverse mortgages are often maligned in this way because, as we mentioned earlier, some people confuse the loans themselves with the practice of lending to individuals with no ability to repay.
In reality, reverse mortgages are a very popular means of unlocking home equity, even for wealthy individuals.
Myth #6: reverse mortgage lenders are just waiting for you to mess up so they can foreclose on your home
The process of foreclosing on a home is messy for everyone involved. The lender will need to go through the correct legal channels, which can take months. They don’t have any incentive to do this unless they see it as their only means of being repaid.
Even if you run into issues, a reverse mortgage lender is far more likely to work with you than swoop in and start foreclosure proceedings on your home.
Still not sure a reverse mortgage is right for you? Consider a home equity loan instead
While reverse mortgages are not a bad idea in and of themselves, no loan product is right for everyone. If you’re not certain a reverse mortgage is right for you, consider a home equity loan instead. Here are a few perks.
You can morrow more
While the Canadian government limits reverse mortgages to 55% of your home’s value, the limit for home equity loans is much higher at 80%. This can provide more funding for home renovations, business capital, or whatever else you’d like a loan for.
Lower interest rates
Home equity loans often come with lower interest rates to account for the decreased risk lenders face relative to those offering reverse mortgages.
Easier to manage
Because you make monthly payments towards your home equity loan balance, there’s less opportunity to live beyond your means and end up having difficulty making repayments.
Contact Alpine Credits to apply for a home equity loan today
For more than 50 years, Alpine Credits has been Canada’s leading provider of home equity loans. Visit this page to learn more about how our home equity loans work and start your application today.
We strive to deliver a decision on your application within 24 hours and can promptly transfer the funds to your bank account upon approval.
Frequently asked questions
A reverse mortgage isn’t a bad idea in and of itself. Under the right circumstances, it can offer access to equity in your home at a reasonable interest rate.
Reverse mortgages are not rip-offs. While it’s possible to bite off more than you can chew with a reverse mortgage, this is true of any loan.
Home equity loans are generally better than reverse mortgages. They’re much easier to manage and less likely to end in foreclosure.
You retain ownership of your house even after taking out a reverse mortgage on it. The bank only takes ownership of your house if you default on the loan, which is rare and difficult.
In Canada, reverse mortgage costs are very transparent. They can include:
- origination fees
- closing costs (appraisal, etc)
- mortgage taxes
- credit check fees
When the last borrower dies, the reverse mortgage lender will contact their estate with information about how to repay the debt. Options typically include:
- selling the home and using the proceeds to pay off the reverse mortgage
- handing the house’s title over to the reverse mortgage lender (common in scenarios where the balance is higher than the home’s value)
- taking out a new mortgage on the property