Reverse Mortgages

I have just completed a CAAMP (Canadian Association of Accredited Mortgage Professionals) online presentation on Reverse Mortgages and their role in providing access to their home asset for seniors in Canada who own their own homes.

This is not the first time I've looked at Reverse Mortgages, but I dare say it is the first time I've really examined them from a number of perspectives, and while I like some of what I see, there is a lot that really disturbs me, particularly since one of the specific objectives of the Reverse Mortgage Companies is to make reverse mortgages "mainstream."

Seniors Money, one of the newest players in this arena, is promoting its product through the training seminar to Accedited Mortgage Professionals "AMP's" and seeking to increase its distribution by selling their product through mortgage brokers, financial planners and directly through their own sales force and web page.

First Promise - "At Seniors Money, we promise that that you won't have to pay that part of the amount you owe to us that exceeds the net sale proceeds of the mortgaged property as long as you are not in default on your mortgage and as long as you sell the mortgaged property for at least its fair market value on the date of the sale, based on an appraisal we may get. "

WHAT?! The implications of their first promise is that perhaps ALL of the equity in a property will be consumed by accumulating interest once a senior has borrowed between 15% and 45% of the appraised value of their property and stayed in the property for a period of time after the loan. If the amount you owe is more than the property sells for you won't have to pay the outstanding balance?

Excuse me. If this is their first promise, I'm getting worried about their second promise. Which is that you can set a minimum percentage of equity to retain in the property upon disposal by sale or death. 10% 20% or even, gasp! 50%

Talk about under promising and over delivering! Canadian real estate has been a strong hedge against inflation for a very long time. For a reverse mortgage to eat up more than the increased value of a property, with a loan advance of only 15-45%, the effective interest rate would have to be quite high.... oh, it is.

No don't get me wrong. There are lots of things I like about Seniors Money, in certain situations I think it is a very viable option for some seniors, but it is not for everyone and there are alternatives to accessing the equity in your property without risking the loss of that equity at all.

Instead - Borrow cheaply against your good name and equity, and lend the money through a mortgage or a mortgage investment company to someone with less good name and still good equity. You never use up the equity, but you gain a consistent source of income. What's wrong with that?