Reverse Mortgages Offer Odious Math For Homeowners

North American households are some of the relatively wealthiest in the world, with 10% of the population having a net worth of $1 million US or more, mostly held in personal residences. On the other hand, 90% have a lot less than $1 million. Seventy-five percent have less than $400,000, 50% less than $100,000 and 60% report having less than $1,000 in savings. You can see a chart break down for Americans in 2016 and 2013 here.

After a 15-year above-average price expansion in real estate into 2017, Canadians have more paper wealth in housing than ever, mostly in the age 50+ cohort. This could be good news for an ageing population with otherwise insufficient retirement savings and little in the way of pension income.  If owners are able and willing, homes can be sold or downsized raising cash for living expenses.  A growing number, however, have been convinced they can keep their home and eat it too with the ‘help’ of a reverse mortgage.

The Office of the Superintendent of Financial Institutions (OSFI) which oversees federally regulated financial institutions and pension plans says that Canadians owed over $3.48 billion in reverse mortgage debt at the end of November 2018–a new record high, up 1.85% from October and 31.68% over November 2017.

The chart on the left, from Better Dwelling, is of reverse mortgage debt growth since 2012, see Canadian Reverse Mortgage Debt rises over 30%, sets a new record.

Since no payments are made throughout the amortization of a reverse mortgage, interest compounds to the payout date, whether that be the owner’s death or such time as they may decide or need to move.  While compound interest is a great friend when it comes to building capital, it is our arch enemy when it comes to borrowing money.

A 55-year old, with a home valued at $1,000,000 can take a loan of $150,000 presently at rates of 6.24 to 6.74% on fixed terms of 6 months to 5 years, as shown here on the ‘Equitable Bank’ website, In addition, upfront set up costs of 8 to 11% are deducted from the proceeds advanced.

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Gary Anderson 8 months ago Contributor's comment

Great article. Reverse mortgages are dangerous!