Sunday, January 6, 2008

Reverse Mortgages

We have worked long and hard and finally paid off our homes, our largest single family asset. Retirement looks promising but the income from pensions and savings will not meet the lifestyle expectations that we have.

Many retired home owners will look to CHIP ( Canadian Home Income Plan) to suppliment their cash reserves.

About Canadian Home Income Plan

Created from a senior’s perspective, a CHIP Reverse Mortgage is a unique home equity borrowing opportunity for homeowners in Canada who are age 62 and older. Senior homeowners can access up to $500,000 tax-free with no payments required on the loan until the home is sold or owners move out.

The amount available to the homeowners is based on the appraised value of the home, the age and gender of the homeowners, marital status, property type, and location. CHIP Reverse Mortgages are available in most areas across Canada, on most types of homes. Leaseholds, co-ops, manufactured homes and large rural acreages are not eligible.

Garth Turner has a slightly different perspective. In a well considered post he makes the point that there are other options available to home owners.

Now, a sleeper of a fact, is that a reverse mortgage operates the same way a regular one does - which means interest is a huge portion of the final debt. In this case the reverse mortgage carries a tag of 7.5%, and because no repayments are made, that charge keeps on adding up until it equals the entire value of the home, consuming all the equity.

So, a senior might borrow $120,000 on a $300,000 home, and by the time of death the reverse mortgage has grown to equal the value of the property - which means the estate which is left behind gains zero benefit from the chief asset the person owned. This is why, when invariably asked about reverse mortgages at financial seminars, my response is the same - a reverse mortgage is an ideal strategy, if you hate your children!

Now here are two weird things: First, you are far better off to take a home equity loan from any major bank, than a reverse mortgage. With a home equity loan there is no minimum amount to borrow, and conversely, you can easily take out 75% of your equity if you want. The money is also tax-free, and it comes at about half the cost of the CHIP funds, since you can borrow at the prime rate - currently just over 4%. You can also set up the loan to make interest-only payments, which ends up being very affordable and - if the loan proceeds are used to invest in income-producing assets, like stocks or mutual funds - the interest is tax-deductible. Another big benefit.

Every senior with an income should check out this option first. But if you are a financial basket case, then go then CHIP route.

I think that Garth Turner makes a valid point. There are alternate choices available and should be considered.

1 comment:

dancilhoney said...

Nice learning from this article. I love my home. The Reverse Mortgages Canada allows me to do that—and I am no longer worried about taxes and maintenance costs.