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Home equity on tap
Reverse mortgages can provide extra cash for retirement years, but they aren't free money
By CARLIE ORESKOVICH
As more Canadian baby boomers prepare to move out of the work force, many may consider a reverse mortgage as a way to make up any financial shortfalls, turning the equity in their homes into additional income for retirement years.
Any financial planner or mortgage broker can set up such a reverse mortgage. But Vancouver-based Canadian Home Income Plan (CHIP) has made these products the focus of its operation, using mortgage funds raised by its parent company, Home Equity Income Trust.
A reverse mortgage, which is available only to homeowners 60 years of age and older, is essentially a loan taken out against the assessed value of your home.
You can receive the money - one-third to one-quarter of the home's value - either in a lump sum or in periodic payments (to provide a steady income), or opt for a combination of the two. Because the money is not considered taxable income, any funds received from the Old Age Security or Guaranteed Income Supplement programs are not affected.
The money can be used any way you like, from home repairs to travel, or to pay off debts or have extra spending money. The loan, including interest, does not have to be repaid until you leave or sell your home.
Greg Bandler, senior vice-president of sales and marketing for CHIP, says reverse mortgages give people another option to raise money during their retirement rather than using a line of credit or a standard consumer loan (which might not be easy for a non-working retiree to obtain).
"These are people who have been in their homes for 20, 30, 40 years which they first purchased for $20,000, $30,000, $40,000 and they have substantial appreciation in the property," Mr. Bandler says. "They have some attachment, both emotionally to the house that's generated all those memories, but also to the neighbourhood and they have a strong desire to stay there."
In the last quarter, CHIP had about $767-million in mortgages, involving more than 7,000 customers.
And the potential pool of customers is large, given that Canada's boomer generation is now between the ages of 42 and 61. In the 2006 census, Canadians aged 65 and older surpassed the four-million mark for the first time, Statistics Canada says.
Homeowners can find out whether they're eligible for a reverse mortgage, and the possible amount, either by contacting a financial adviser or a CHIP agent or going to the CHIP website (www.chip.ca) and filling out the questionnaire. Because your age and the assessed value of your home are the primary considerations, the process is fairly straightforward.
Many people who are considering reverse mortgages may worry that the equity of their home can be eaten up by the loan, leaving nothing when it is sold. But Mr. Bandler says the homeowner can never owe more than the value of the dwelling.
"That's guaranteed. We assume that risk," he explains, pointing out that in 22 years of operation, CHIP has had only three cases when that happened, and "that was all related to our earliest mortgages we put out in the marketplace.
"We lend very conservatively. We lend up to 40 per cent of the value of the home, with the average loan to value about 33 per cent," Mr. Bandler says.
On a $300,000 home, for example, the homeowner might take out a $100,000 CHIP loan, retaining two-thirds ($200,000) of the remaining equity. After 15 years, the amount owed would rise to about $200,000. But Mr. Bandler points out that the house would likely also have appreciated in value as well over that time span, so the homeowner's equity share would have grown, and he would have also had the benefit of the $100,000 loan.
The cost of filing a reverse mortgage through CHIP comes to about $2,285. First there is an appraisal fee of $150 to $200, which the homeowner pays. Lawyers' fees usually range from $300 to $600. And CHIP charges $1,485 for the closing, administration and legal fees.
Because of the nature of the loan and the fact that some customers can be elderly, CHIP requires that the homeowner obtain independent legal advice to avoid competency questions.
"We do insist that each and every client receive independent legal advice to make sure that they understand the details of the program and that they are of sound judgment and able to enter into an important financial decision like this," Mr. Bandler says.
David Stevens, a mortgage broker with Mortgage Alliance in Spencerville, Ont., says it is a misconception that a reverse mortgage releases "free money" to the homeowner.
A reverse mortgage is no different than a regular mortgage, he says, but carries a higher borrowing rate, usually 1.5 to 2 points above the prime lending rate.
"You are still borrowing, one way or the other," Mr. Stevens says. "It's just that you don't make payments."
He adds that in the current economic climate, the market for mortgage-backed securities is drying up. "All of a sudden nobody wants to buy these mortgage-backed securities any more because they're not turning out to be a very safe investment."
Financial adviser Martin Kosterman, of Fiscal Agents, Wealth Management Services in Oakville, Ont., isn't a fan of reverse mortgages.
He says that in most cases there are alternatives that work better for home-owning retirees.
He says that even when he was specifically asked by a customer to create a reverse mortgage, he refused because he didn't want to give advice that might not be in the person's best interests.
Special to The Globe and Mail