REVERSE MORTGAGE DOWN PAYMENT GIFTS: GOLDEN OPPORTUNITY OR GOLDEN YEARS GAMBLE?
For most of us, homeownership is fundamental to securing our golden years. For those who don’t get on the property ladder because they can’t afford a down payment, it can be a financial gut punch in retirement .
Increasingly, parents and grandparents are playing financial fairy godmothers, determined to protect their heirs from this fate. They want to help their kids or grandkids buy now in case rising values price them out of the market.
“In the past year, we have seen a 15.5 per cent increase in new reverse mortgage holders reportedly using funds for gifting purposes,” says Yvonne Ziomecki-Fisher, EVP of marketing and sales at HomeEquity Bank, Canada’s largest reverse mortgage provider.
This trend recently led the bank to launch a faster way for senior homeowners to use their equity for down payment gifts. It’s a streamlined online application called HomeBridge .
But for most, a home is the crown jewel of their retirement assets. Is leveraging it to bankroll your kids’ real estate ambitions a stroke of genius or a fast track to a ramen noodle retirement?
Here are five reasons to consider it and six reasons why you shouldn’t.
Arguments against
1. The cost
Reverse mortgages are the financial equivalent of a very hungry tapeworm. Five-year fixed terms range from 6.49 to 6.69 per cent today, two percentage points higher than normal mortgage rates . At that price, with three per cent average annual appreciation, someone getting the maximum reverse mortgage around age 65 could see their loan gobble up all their equity by age 92 (after roughly 26 to 27 years).
Tip: If you’re dead set on a reverse mortgage, be sure to shop rates and features with all three of the biggest providers: HomeEquity Bank, Equitable Bank and Bloom Financial.
2. You could live longer than expected
If someone makes it to 75, odds are they’ll live to about 88 on average, give or take, according to Statistics Canada. There’s roughly a one in six chance they’ll make it to 95 — amid neverending increases in health care and cost of living expenses. If you’re a cash and asset poor homeowner and deplete your equity early, your retirement plan becomes a GoFundMe waiting to happen.
3. You’ll have less borrowing power later
Traditional lenders don’t lend behind reverse mortgages. That could be a factor if you need money later for some other reason.
4. Home value volatility
If real estate values drop, you could face a situation where your home value decreases while the loan balance keeps rising. Reverse mortgages have “no negative equity” guarantees, but you’ll still be left with less if you have to sell in a down market. That’s a bigger risk if you need funds for assisted living elsewhere.
5. Multi-heir considerations
Leaving one heir a down payment and the others a photo album is how you turn Thanksgiving into a true-crime documentary. Moreover, if other heirs are expecting to inherit your property or if there are other debts in the estate, a reverse mortgage can complicate the distribution. This may require awkward conversations or getting a bigger reverse mortgage to “pay off” the other heirs — so to speak.
6. There may be better ways
Liquidating other assets, downsizing or borrowing a down payment gift from a home equity line of credit (HELOC) may cost less, even if you use the HELOC to pay the interest due each month.
The HELOC idea assumes you already have one or can qualify for one — which isn’t easy for typical reverse mortgage customers with insufficient non-home assets and income. The key in these cases is that you never want to get a HELOC bigger than 75 to 80 per cent of the reverse mortgage you qualify for. That way, if need be, you can use a reverse mortgage to pay off the HELOC and eliminate its monthly payments.
Speaking of HELOCs, some seniors loan down payment funds sourced from a HELOC and then ask their giftee to make the HELOC payments. Just keep in mind that when your family member uses those funds for a down payment, their lender typically requires you to sign a legal gift letter stating that the funds are a gift and don’t need to be repaid.
Alternatively, some parents provide down payment assistance with a callable low- or zero-interest promissory note stipulating that the money be used for a down payment. The goal is to prevent an estranged spouse from taking half the gift in a divorce. However, the child or grandchild must disclose the funds as borrowed to their lender — which may make it harder to qualify for a mortgage. Talk to a lawyer and seasoned mortgage broker for advice here.
Arguments for
1. Emotional reward
Many parents and grandparents don’t want to wait to be a posthumous hero. They’d prefer the warm, fuzzy feeling of helping their family now — watching their kids cry tears of joy instead of reading their will like a courtroom drama.
2. Younger homeowners do better
Despite the benefits of renting in many cases, overall, people who can’t afford to buy — or wait too long to buy — retire poorer. Statistics Canada data show that for those above 65, the median net worth for homeowners is 15 times greater than that of renters.
3. You get to stay in your home
People who sell reverse mortgages like to remind borrowers that there are no required payments, there’s no tax hit on reverse mortgage proceeds, and you can’t be kicked out of your home — even if the reverse mortgage is more than it’s worth. Of course, you have to maintain the home and pay the property taxes.
4. You can’t or shouldn’t liquidate other assets
Sometimes, despite a reverse mortgage interest rate that may seem high, cashing out of other investments (forgoing future gains and facing tax liability), doesn’t make sense. Reverse mortgages may also serve as bridge financing until you sell another property, business or investment later — the proceeds of which can be used to pay off the reverse mortgage.
5. You’re really old
Other things equal, the later you do this strategy, the less risky it is (for you, not necessarily your descendants).
“I would use non-registered or TFSA savings first, followed by a home equity line of credit,” says advice-only financial planner, Jason Heath, from Objective Financial Partners. “If those options are exhausted, a reverse mortgage can work but be careful about risking your own retirement to help your kids buy a home they might not be able to afford in the first place.”
For the majority of Canadians, their home is a security blanket, not a sacrificial lamb. In most cases where one has few other liquidatable assets or savings, I can’t in good conscience recommend leveraging the asset and limiting one’s future flexibility for someone else’s living inheritance.
In cases where you’re financially secure in retirement, have gobs of equity, don’t plan to move, and a HELOC or asset liquidation is not an option, a reverse mortgage might make sense. This could be especially true for those who worry they may not live that long.
As with any financial decision, however, people are like snowflakes: everyone’s situation is different. If you’re seriously considering this, speak with an independent, unbiased financial advisor — preferably one whose answer doesn’t impact their future commissions.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
This table reflects the prevailing rates at the time this story was published. For the best mortgage rates in Canada right now, click here.
2025-02-14T11:08:36Z
