A new look at reverse mortgages
It may be a cliché, but "house rich, cash poor" is an apt description of many Canadians entering their so-called golden years. If this sounds familiar -- perhaps you purchased your home decades ago but find yourself living on a fixed income that's inadequate for your expenses or lifestyle -- it's tempting to borrow against an equity that's now worth hundreds of thousands of dollars.
The first question is, should you take on such debt? If so, is a reverse mortgage the way to go?
Using equity to your advantage
"Tapping into the equity you have in real estate is a great philosophy," says Ted Rechtshaffen, president and CEO of TriDelta Financial in Toronto. "It's something that is significantly under-used."
"It's what I call the classic Canadian retreat. In a nutshell, it goes like this: Grew up poor, and carried that mentality through life," creating a belief that saving is "good" and debt is "bad", he says.
Rechtshaffen advises that older Canadians should rethink this mindset and look at their home equity as an asset -- an asset they might use to make life more affordable now, or to realize some of their life dreams that are impossible without more cash. In general, he favours using a line of credit secured against home equity, but says there can be a place for reverse mortgages.
In Canada, there is one institution for reverse mortgages -- the Canadian Home Income Plan [http://www.chip.ca/], or CHIP, which has offices in Ontario, B.C. and Quebec. A loan can be arranged through CHIP directly or through financial institutions such as banks, credit unions and brokers.
How does a reverse mortgage work?
- You (and your spouse) must be at least 60 years of age to qualify
- The mortgage is secured against the portion of your home's value that is debt-free
- A homeowner can borrow between 10 and 40 per cent of the current home value
- The money can be taken in a lump sum or monthly installments
- The borrower can defer repayment entirely or make installment payments
- The loan must be paid off upon the death of the homeowner or sale of the property
What interest and fees are charged?
The benefit to cash-strapped seniors is clear, but anyone considering a reverse mortgage should be aware of the costs, both in terms of interest and fees:
- Borrowers can choose fixed or variable interest rates. CHIP posted rates (as at publication date) started at 4.75 per cent for a variable term and 4.9 per cent for a 6-month or one-year fixed terms
- Setup costs include an appraisal fee ($175 to $400) and independent legal advice, which varies, but typically costs between $300 and $600