More Canadian parents with adult children are looking for ways to help those children financially, especially with the purchase of a home. Young adults in expensive housing markets like Toronto and Vancouver are finding that help from the parents is the only way to get onto the property ladder. As property values have risen dramatically over the past ten years, many of those parents are now in a good position to provide that help.

The solution recommended is a reverse mortgage. The parents tap into the equity (up to 55%) in their home and use it to provide a loan to their adult child, who in turn uses it to purchase his or her own home. A financial planner at HomEquty Bank, Rona Birenbaum, says it has become such a common topic, with up to 30% of her clients aged 60 and over wanting to talk about ways to help out their children, that the bank set up a special program to provide guidance. It helps parents with important questions like the “safe” amount they should lend their children and how to protect that money. According to Birenbaum, it’s the only way many young people can manage these days.

Ten years ago, this topic rarely came up as most seniors were more concerned with remaining self-sufficient. And, first time homebuyers were purchasing houses on their own. That’s changed. Up to 30% of my clients aged 60+ now want to discuss to what degree they can help their adult children financially.

It sounds like a good idea. Depending on the market, a person’s home may be worth $1 million or more, but that money is locked up. The reverse mortgage converts that locked up money into cash. Aside from using it to help the children buy their first home, those who take a reverse mortgage can finance their own plans as well—home repairs and renovations, medical expenses, trips. One of the biggest selling points for this type of mortgage is that the borrower must make no regular payments as long as he or she lives in the home. The money can be used to pay off other debts, and generally provide a better lifestyle.

While the reverse mortgage lenders tend to emphasize the benefits of tapping into one’s home equity—a more comfortable retirement, access to money when you need it—watchdog organizations like the (US) Consumer Financial Protection Bureau (CFPB) take a more cautious approach. From the CFPB perspective, draining away one’s home equity should always be the last resort. It recommends exploring all possible alternatives, including downsizing to a more affordable home. “It is usually best to preserve your equity if you have other resources to meet financial needs,” advises the CFPB. Those who think they need to access their equity are strongly advised to get professional advice from housing and financial experts.

One of the main objections that is often raised concerning reverse mortgages is the fact that they can complicate the home owner’s ability to leave the home to his heirs. This could occur if the home owner had difficulty paying the property taxes and insurance on the home, which could prompt the bank to foreclose on the home. It could also occur if the home owner died. In that case, the home would be sold and the bank would take its share first. If the home were to sell for more than the outstanding loan balance, the heirs would get that amount. Alternatively, the heirs could choose to pay off the outstanding loan balance and take possession of the home.

The home owner must also continue to live in the home for as long the mortgage is in effect. If the home owner were to move out, he would have to pay the mortgage off. Failing health could be one reason for this to occur. As long as the elder remained in good health and able to live independently in the home, the reverse mortgage debt might not be a problem. If the elder had to move to an assisted living facility or nursing home, however, the mortgage would become due, with the expense of paying it off. That could compromise the elder’s ability to pay for quality nursing home care.

Since the interest rate on a reverse mortgage is typically much higher than on a conventional mortgage, the amount of debt owing can mount quickly if the borrower chooses not make any regular payments.

The Financial Consumer Agency of Canada lists the following advantages and disadvantages of a reverse mortgage.

Advantages
• No regular payments on the loan.
• Turns the value of the home into cash, without having to sell it.
• Tax-free source of income.
• No effect on the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.
• Ownership of the home is maintained.
• Choice of receiving money as a lump-sum payment or in planned advances, or both.

Disadvantages
• Higher interest rates than most other types of mortgages.
• Equity in the home decreases as interest on the reverse mortgage accumulates over the years.
• At death of the borrower, the estate must repay the loan and interest in full within a limited time. The time required to settle an estate can often exceed the time allowed to repay a reverse mortgage. For full details, check with the reverse mortgage lender.
• When principal and interest have been repaid to the lender at the death of the borrower, there will be less money in the estate for children or other heirs.
• Costs associated with a reverse mortgage are usually quite high, and may include a home appraisal fee, application fee, closing fee, legal fees, and repayment penalties.

More Parents Using Reverse Mortgages to Help Adult Children Buy Homes by Josephine Nolan | Condo.ca