The list of detractors of reverse mortgage has another name added to it: David Chilton, otherwise known as ‘the wealthy barber’, after the title of this famous book on personal finance.
At a speaking engagement Thursday night in Scarborough, Ont., Chilton discussed various mistakes people make while managing their financial affairs. Taking out reverse mortgage, he pointed out, was one of them and against the grain of common sense.
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“When you take out a reverse mortgage, you’re turning compounding into your enemy instead your friend,” said Chilton. “Experts intuitively think negative of reverse mortgages. All the David Chiltons of the world have spent their entire life telling you to harness compound, not to fight it.”
Things could spin out against the borrower quite quickly, he explained, if interest rates were to shoot up to 10%. Admitting it was a highly unlikely scenario given the anemic state of the world economy, but Chilton said anything can happen down the road.
“In essence, what you’re doing with a reverse mortgage is spending your kids’ inheritance,” he said. Not that he has a problem with that. “Seniors should try and spend a little bit of their money. It’s interesting the number of seniors that I have met aged 70-72, trying so desperately to save so they can leave for their 45-year-old kids who have way more money than the senior.”
Chilton, as he is known to do, peppered his speech with wit and humour to drive his message home.
“My father once asked me ‘Dave, I’ve heard of this reverse mortgage idea, what do you think of that?’ I said they are illegal in this country, dad,” he joked.
On a more serious note, he pointed out that seniors don’t want to sell their homes in retirement and downsize. This has led to explosive growth in reverse mortgages.
“In Canada we have an incredible number of people living in quite nice homes, often fully paid for. They are 65 or 70 years old, but they don’t have much cash flow,” he said. “It’s a myth that all seniors will one day sell their homes and move into a much humbler place. People don’t like moving. They are in an established neighborhood [where] they have friends and everything else.”
What they want, he said, is to gain access to their home equity without moving. “And reverse mortgage is one way to do it—not in a perfect way, but it’s one way to do it.”
Chilton maintains his negative slant on reverse mortgage in his latest book The Wealthy Barber Returns, in which he discusses the product in a section titled ‘A Controversial Solution’, but tempers his criticism a touch with “don’t rule them out.”
“Reverse mortgages have several drawbacks and shouldn’t be used without looking at all the other alternatives carefully. And even when they seem appropriate, a HELOC [a home equity line of credit] may be a better move,” reads a passage in the book.
“But don’t rule them out—they are one possible solution to an all-too-common problem.”