Reverse my ass!!! Its a mortgage

I hate it when I see what I consider to be deceptive advertising, I'm one of those cynics who believes in simple and easily understood language.  Some time over the past ten or so years dead end streets became "cul de sacs".  And the French word Faux, which means "fake", has been slapped on all kinds of plastic products to make them seem sexier,  as in faux oak or faux mahogany. 

And now we have the so called "reverse mortgage".  I don't allow profanity here, but what the FRICK is that???   I'll tell ya what it is, its a mortgage, but the marketing geniuses flogging this vehicle knew that wouldn't fly, so they found a new angle.  And in my view the way seniors are targeted, its on the cusp of being unethical.  Call it what it is, a payment free mortgage but underline that interest owed is added to the principle and compounded.  

Canada's population is ageing, which brings on many challenges for people who've retired, and financial considerations are often top of mind.  There are lots of Canadians retiring without a pension plan beyond CPP, and insufficient RSP holdings to fund their golden years.  But....many own their homes, often free and clear.

Its a big accomplishment in people's lives, paying off the mortgage, some still celebrate by having a party and burning the actual paper.  But there's an old saying in financial planning circles, you can't eat your house.  While it may be feasible and perhaps even desirable to move from a strictly financial perspective, many people in their sixties and older, they don't want to relocate.  And who can blame them?  You've spent 25, 30, 40 or maybe even 50+ years in a home.  So why not stay?

And that's where marketing comes in.  Knowing that many older Canadians have only one valuable financial asset, one they've spent a good chunk of their working lives paying off, these wizards know that the thought of taking out a mortgage is repugnant.  So instead of calling it a mortgage they call it a "reverse" mortgage.  How do they get away with this?

The ads tell people they can unlock up to 55% of their homes value, "and never have to make a payment".  But make no mistake, there is a cost, a big cost.  The interest rates on these so called "reverse mortgages" can range between 5 and 6% and even higher.  All that happens is the interest is tacked onto the principle owing.  

Why borrow money at prices that can be double what traditional mortgages are charging???

Imagine a couple with a property valued at $300,000 who want to "unlock" 55% of their home's value. That's $165,000 which leaves $135,000 of equity.  At a 5% annualized interest rate that's $8,250 worth of interest expense being added to the total amount owing, and its compounding, owing interest charged on interest.  The equity of the home is going to erode pretty quickly, and with people living longer and longer lives this could spell financial disaster. The one asset they've spent years paying off could end up being worth nothing to them.  

Imagine this scenario, a couple takes out this "reverse" mortgage then live another 15 years and get hit with a major expense, like having to move into a care facility.  They can sell the home, but then they have to pay off the mortgage, and the mortgage company is first in line for any debts.  It ain't a reverse mortgage any more.  Its conceivable they could be broke, all the equity in the home pffffffffffft, gone.  

  

I'll end this here....but I would urge anyone considering a "reverse" mortgage to consult with a financial advisor and to explore less costly options before taking out a high interest no payment mortgage.  Even one that uses the term "reverse" to make it seem like something else.  

If you want to read a more detailed, and better written article....here's one from The Globe & Mail from 2010 that still applies today, maybe more so.

http://www.theglobeandmail.com/real-estate/mortgages-and-rates/the-reverse-mortgage-quandary/article1391748/