A reverse mortgage is a relatively rare financing technique aimed exclusively at seniors. In a nutshell, senior home owners borrow against the equity in their principal residence and the principal money is advanced in a single lump-sum or instalments and accrues interest over the period of the term. No payments are made during the term and the total amount owed is payable in one lump-sum at the end of the term, being when the borrower dies. Upon the death of the borrower, the amount outstanding is payable by the borrower’s heirs or by the sale proceeds in a power of sale if the heirs refuse or are unable to pay.
Due to the nature of how reverse mortgages function, actuaries must predict the average time of death of each borrower and therefore the length of the payment-free period; the older the borrower is, the closer the person will be to dying and the more funds the lender can advance. For this reason, lenders rarely give reverse mortgages to borrowers younger than age 62. This is why reverse mortgages are generally granted to seniors who have little cash liquidity but much house equity. Furthermore, lenders need to ensure there will be enough equity in the mortgaged property to pay off the principal and interest balance accrued up to the time of death.
These factors which impact the typical reverse mortgage scenario generally result in certain drawbacks for seniors that have many advocates concerned, namely, low loan-to-value ratios, smaller loan proceeds than with traditional mortgage products, higher net costs of borrowing and largely diminished home equity.
However, the biggest concern and which I witnessed in an estate planning context is ensuring that the borrower truly understands the pertinent attributes of a reverse mortgage and the implications of granting that type of security over their home. In one actual client matter, an elderly gentleman advised me that their home was a part of their estate. They, therefore, gave me instructions as to who are to be the beneficiaries of their estate, the main asset of which was the house, on their death.
After obtaining a title search on the property, I was surprised to find that there was a reverse mortgage on the property. When I questioned the client about it, they seemed confused as to the mortgage’s existence. The lender, of course, assured me that the client had received independent legal advice at the time they granted the mortgage. However, the client still did not appear to know or understand that the home would no longer fall into their estate but instead would belong to the lender at the time of their death. Needless to say, I was very disturbed and saddened by the situation. I was also less than happy to have to be the bearer of bad news to the client.
As is the case with any contract, it is important that borrowers truly understand and freely enter into a reverse mortgage contract. Although the situation demonstrated the importance of reviewing assets during an estate planning initiative so that appropriate plans can be implemented, it was arguably too late at that point to change the reverse mortgage contract.
If you have a question about a reverse mortgage or other financial planning products or initiatives, please contact Andrea Kelly.
Andrea Kelly, Lawyer, has extensive experience in wills, trusts, powers of attorney and estate administration matters. She provides clients with a high standard of timely professionalism and expertise, incorporating a very thorough fact finding process. This is quite often enlightening for her clients and facilitates individually tailored services. If you would like to know more, feel free to use the easy contact form or read Andrea’s bio.