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Is a reverse mortgage for you?

May 21, 2015

Adapted from Adam Mayers of The Toronto Star:

With many people retiring with either too much debt or not enough savings and a depleted income, many wonder if a reverse mortgage is the answer.

If the house has a lot of equity, a reverse mortgage can help offset income, renovate or give their children an early inheritance.

In some cases it can be a good idea only if all other options have been exhausted.

HomEquity Bank sells most of the reverse mortgages in Canada with the bulk sold to Toronto and Vancouver customers  through Canadian Home Income Plan (CHIP).

Reverse mortgages :
a) carry a higher rate of interest than a conventional mortgage.
b) it depletes your biggest asset.
c) if you are considering this avenue you are probably under financial pressure but if you have poor money habits you may be delaying the inevitable unless you change your ways.

Here is how a reverse mortgage works:

To qualify: If you are over 55 and own a mortgage-free home, you can get 55 per cent of its value. The money is tax-free and you do not have to pay anything back until you move, or die. At that point the principal, plus accumulated interest, is due in full.
The rate: It is a lot higher than a conventional mortgage. HomEquity is offering a 5-year fixed reverse mortgage at 4.99 per cent.  At the end of the five-year term, the rate is renegotiated. It could be higher or lower depending on market conditions.
The real cost: It’s easy to forget about this. True, you do not make payments, but the interest accumulates. Assume $100,000 borrowed at 4.99 per cent. In eight years it is roughly a debt of $150,000. It doubles to $200,000 in about 14 years.
Yvonne Ziomecki, a senior vice president at HomEquity, says typical clients are in their early 70s, borrow $110,000 and usually sell their home within six to eight years.
Ziomecki says the process involves a home appraisal and those with mortgages would not be turned down, though they would be able to borrow less. Applicants must have a lawyer to ensure they understand what’s involved. HomEquity encourages the entire family to get involved to avoid acrimony later.
HomEquity sees four types of customer:
Debtors (35%): They have lousy money management habits and may be maxed out on department store and bank-issued credit cards. They have long credit lines and in some cases big mortgages. It adds up to a poor credit rating, so they often can’t borrow more from their bank.
Spenders (30%): They want a better lifestyle without the payments. It could be a condo in Florida or a major home renovation. They may not want a credit line because they’d have to make a payment every month.
Cash poor (17.5%): This group can’t make ends meet. Their pension income and savings are modest. Many are single women or widows who didn’t work outside the home. They need the extra cash to stay afloat."
Unexpected needs (17.5%): This could be big bills or a desire to deliver an early inheritance to the kids. If the latter, giving the money makes them feel good.
Diane McCurdy, a financial planner in Vancouver  recommends reverse mortgages in some cases where clients want to stay put for five or 10 years perhaps to be near friends and family and need the extra money to be able to do that but.
“It is all about quality of life,” she says, “For seniors [it] might be what is needed. But we look at a lot of other alternatives first.”

HomeEquity had a banner year in 2014. Its reverse mortgage business rose 23 per cent and was worth $309 million. As more Boomers head into retirement, the company says it expects the growth to continue.