According to a provincial mortgage specialist, reverse mortgages have grown in popularity in recent years.
With the consistent rise of inflation basically making life so expensive, with the cost of groceries, fuel, and day-to-day items increasing, people have looked to reverse mortgages.
Mortgage Broker with The Mortgage Group, Conrad Neufeldt says a reverse mortgage is a good long- or short-term option for those facing financial difficulties.
“It’s where a loan is put onto your home and rather than making mortgage payments every single month the interest that is owed instead gets tacked on to the mortgage every month,” says Neufeldt. “You never actually make payments every month, you’re essentially mortgage payment-free.”
Neufeldt adds that the reverse mortgage debt that is owed to whichever lender continues to grow over time. There is a backstop in place though, meaning that the mortgage will never accrue to be more than the home is worth.
“When you sell the home whatever equity is left over between what you sell it for and what is owed and if that’s a negative number then you get no equity. Whatever equity is left you get to keep, you’re basically trying to utilize the full equity that you have to eliminate your mortgage payment,” adds Neufeldt.
A reverse mortgage is essentially “life debt”, which is what the term mortgage means in French.
There are some benefits to those that own their home and decide to get a reverse mortgage.
“Instead of making a mortgage payment every month, you’re given a payment every month to assist in your living.”
Neufeldt explains that the conversation about reverse mortgages has been more with people above the age of 55. This is because inflation has affected their bottom line with most having more of a fixed income and a reverse mortgage could help them withdraw some of the equity of their house to help combat rising fuel and grocery costs.
It’s not just those homeowners 55+ that are feeling the pinch when it comes to inflation, Neufeldt notes that financial struggles are had by a lot of Saskatchewan residents.
One of the most common conversations Neufeldt has with his clients is “I can’t afford life” and “how do I fix this payment situation I’m in”.
He says that has been driven by the rising cost of rent but also by the Bank of Canada’s key interest rate consistently rising, which has affected those with variable-rate mortgages.
“Part of that was you had people back in 2020 and 2021 that were being pushed into variable rates because the stress test was lower. You had people who couldn’t necessarily qualify for those longer-term fixed-rate products that were being pushed into those variable-rate products that aren’t as stable.”
A variable rate mortgage is one that is tied directly to the prime rate (the interest rate banks and lenders use to determine the interest rates for loans, lines of credit, and mortgages) and will fluctuate depending on the prime rate.
A fixed-rate mortgage is when the interest rate and the monthly payment will stay the same throughout the mortgage term.
The stress test is just a minimum threshold that anyone applying for a mortgage in Canada has to meet.
Fast forward to now, Neufeldt is seeing more and more people facing financial difficulties because of the upward surge of the key interest rate and not knowing how to handle that increase.
“A couple of weeks ago we had a woman call us and she had to explain to her four-year-old daughter why she was pouring water into her cereal instead of milk. Those calls are always heartbreaking.”
Possible solutions for those facing financial struggles could be a reverse mortgage or looking at refinancing your home.