Market Insight for February 21

Reverse Mortgage Down Payment Gifts: Golden Opportunity or Golden Years Gamble?

For many of us, homeownership is key to ensuring financial stability in our golden years. For those unable to get on the property ladder due to a lack of funds for a down payment, the long-term financial impact can be significant.

More frequently, parents and grandparents are stepping in as financial benefactors, eager to shield their heirs from this predicament. They want to assist their children or grandchildren in purchasing property now before rising real estate prices push ownership out of reach.

“Over the past year, there has been a 15.5% rise in new reverse mortgage holders who report using the funds for gifting purposes,” says Yvonne Ziomecki-Fisher of marketing and sales at HomeEquity Bank, Canada’s largest reverse mortgage provider.

This trend recently prompted the bank to introduce a faster way for senior homeowners to tap into their equity for down payment gifts. The result is a streamlined online application called Homebridge. Here are five reasons you might want to consider it and six reasons why you may want to think
twice.

Arguments Against

1. The Cost
Reverse mortgages are like financial quicksand. Five-year fixed rates currently range from 6.49% to 6.69%, which is about two percentage points higher than conventional mortgage rates. At that price, assuming an annual home appreciation of 3%, a homeowner who takes the maximum allowable reverse
mortgage at 65 could see their loan consume all their home equity by around age 92.

Tip: If a reverse mortgage is your only option, compare rates and features from the three largest providers: HomeEquity Bank, Equitable Bank, and Bloom Financial.

2. Longer Life Expectancy
Statistics Canada data suggests that if you reach 75, you have a high probability of living until about 88. There’s also nearly a one-in-six chance you could reach 95—all while healthcare and living expenses continue to rise. If you burn through your equity early, your retirement could turn into a
crowdfunding campaign.

3. Limited Borrowing Power
Later Traditional lenders generally do not offer secondary financing behind reverse mortgages. If you need additional funds in the future for unexpected expenses, your borrowing options could be significantly restricted.

4. Home Value Fluctuations
If property values decline, you could end up in a scenario where your home’s worth decreases while your loan balance continues to grow. Though reverse mortgages come with a “no negative equity” guarantee, you could still have little to no equity left if you need to sell in a down market—especially if assisted living costs arise.

5. Family Inheritance Complications
If multiple heirs are anticipating an inheritance or if the estate carries other debts, a reverse mortgage can complicate estate planning. This could lead to uncomfortable conversations or necessitate taking out a larger reverse mortgage to compensate other heirs.

6. Potentially Cheaper Alternatives
Selling other assets, downsizing, or even using a home equity line of credit (HELOC) for a down payment gift might be more cost-effective. Even if you pay interest on a HELOC monthly, it could be a more financially sound choice.

Some seniors use HELOC funds to provide down payments, with the giftee responsible for the payments. However, lenders typically require a legal gift letter confirming the funds don’t need to be repaid. Alternatively, some parents offer down payment assistance using a low or zero-interest promissory note, preventing an estranged spouse from claiming half in a divorce. However, since lenders may classify this as borrowed money, it could impact mortgage approval. Consult a lawyer and mortgage professional for guidance.

Arguments For

1. Emotional Satisfaction
Many parents and grandparents don’t want to wait until after their passing to help their loved ones. They prefer to experience the joy of giving now rather than leaving an inheritance that unfolds like a dramatic courtroom scene.

2. Younger Homeowners Benefit
While renting has its advantages, homeowners tend to accumulate significantly more wealth. According to Statistics Canada, the median net worth of homeowners over 65 is roughly 15 times that of renters. Gifting a down payment can provide a financial head start.

3. Remain in Your Home
Reverse mortgage providers emphasize that there are no mandatory payments, the funds aren’t taxable, and homeowners can stay in their residence for life—even if their loan balance exceeds the home’s value. However, homeowners must keep up with property maintenance and taxes.

4. Avoid Liquidating Other Assets
Depending on personal circumstances, cashing out investments may not be the best move. Reverse mortgages can also serve as short-term financing until other assets, such as a business or additional property, can be sold to repay the loan.

5. Age Matters
The older you are when taking out a reverse mortgage, the less time the interest has to compound—which reduces the risk.

“I would use non-registered or TFSA savings first, then consider a HELOC,” says advice-only financial planner Jason Heath of Objective Financial Partners. “If those are exhausted, a reverse mortgage may be a viable option—but be wary of jeopardizing your own retirement for your children’s
home purchase.”

For most Canadians, their home is a financial safety net, not an expendable asset. If you have few other liquid resources, leveraging your property to help someone else buy a home may not be the wisest move.