Real Estate Appreciation

THIS IS THE MOST OVERLOOKED FACT of whether or not to invest in a Reverse Mortgage.

In Reverse Mortgages there are two sides to the financial equation. Accrued interest AND appreciation of property.

A Reverse Mortgage is… “A loan secured as a mortgage that allows you to get money from the equity in your home.”

I am going to provide you with 2 quotes from someone who claims to be a Certified Financial Planner, Tax Specialist AND a Mortgage Broker ALL IN ONE.

May 2023: “The pros to reverse mortgages are that you don’t have to make regular loan payments and you can turn the value of your home into cash without having to sell it”.

” The biggest drawback I see is that the equity you hold in your home will decrease as you accumulate more and more interest on your loan.”

THIS IS TOTALLY INACCURATE and misleading to anyone who reads this, in my opinion.

There is NO CONSIDERATION for the increase in value of the property over the span of the Reverse Mortgage.

Let’s consider a property valued at $1.0 million and a Reverse Mortgage with a value of $200K, $300K, $400K it doesn’t really matter as this is just an illustration.

CALCULATION

So the Reverse Mortgage amount you use, let’s use 7% as the interest rate.

OR you can use 8%, 9% whatever you determine would be appropriate.

Now what percentage do you think the real estate market will increase by in 2024, 2025, 2026?

We have survived COVID, are at the tail end of inflation and the interest rates are “projected” to decrease in 2024, 2025 and on.

Be conservative and pick 3% or 4% or 5%.

Here are 2 links to our Real Estate pages we provide to everyone on this website:

1. Ontario Real Estate Market (OREM)
2. Canadian Real Estate Association (CREA)

So now you do the math.

Pick an interest rate listed above, and then apply that to a Reverse Mortgage amount you want to borrow.

Now calculate the percentage increase in property value (starting at $1.0 million) over the same period of time.

NOW substitute ALL THE ABOVE VALUES to your own property in terms of value AND what you desire as a Reverse Mortgage.

A further quote from the same individual (May 2023):

“It is definitely an option to “stay and play, but I must caution you on the compounded-interest component”.

“Interest is continually added to your loan each month and tacked on to the principal balance.”

“This means that interest accrues on a larger balance each month so you are basically paying interest upon interest.”

“If you are looking to this product to shore up your financial resources so you can stop working, pay off credit card debt or travel and enjoy life,

I would suggest you either sell your home and downsize……..”

ABSOLUTELY FALSE

The borrower pays interest on the amount of Reverse Mortgage advanced, and that is what the interest accrues on.

There is NO compounding of interest and the borrower DOES NOT PAY INTEREST ON INTEREST in a Reverse Mortgage.

In my opinion, to state “I would suggest you either sell your home and downsize….” is absolutely disrespectful to anyone who reads that.

Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month.

You may usually borrow up to 55% of the current value of your home, subject to certain lender restrictions listed below.

This money doesn’t affect the Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting.