The money comes from tapping into their home’s equity, but can mean less inheritance for their kids
LuAnn LaSalle
Sun
MONTREAL — Dorothy and Ed wanted to put their three grandchildren through college. In their late 60s, they also wanted to upgrade their home and invest.
Nadir, 82, wanted to give his two sons their inheritance early, while 69-year-old Martin and his wife Tina, 64, wanted to pay off their debts and retain some investment income.
They all turned to reverse mortgages from the Canadian Home Income Plan (CHIP), a wholly owned subsidiary of Home Equity Income Trust, as a solution.
Their stories, last names withheld to protect their privacy, are told on the Canadian Home Income Plan’s website.
Typically, the average age of a couple who applies for a reverse mortgage is about 72-years-old, said Greg Bandler, senior vice-president at CHIP.
“It’s a couple that has been retired for, give or take, about 10 years and essentially they’ve reached the stage in their life where they want to enjoy some additional things in their lives whether it’s travel, or starting to do some estate planning and gifting to their own children,” Bandler said in an interview.
The money that comes from tapping into their home’s equity is also used for renovations, retrofitting or investments to generate income, he said from Toronto.
“It’s really all about maintaining or sustaining or even in fact improving their current lifestyles at the stage that they’re at, but still being able to stay in the home.”
Bandler said he wouldn’t recommend a reverse mortgage, which has higher interest rates, as a short-term financing solution.
“There are other vehicles that should be available to people if that’s what they are looking for.”
He also said he wouldn’t recommend a reverse mortgage if the home is going to be sold in the near future or if the owner is expected to leave the house sooner than anticipated due to failing health. There are pre-payment penalties in the first three years, he added.
The minimum age to qualify is 60 and both spouses must be at that age to apply, Bandler said, adding there are no income, credit or medical qualifications.
The maximum amount on a reverse mortgage is $500,000 and the minimum is $20,000. There’s no repayment until the house is sold or death.
You can never owe more than the fair-market value of the house at the time the loan is repaid, Bandler said.
The interest on a reverse mortgage is cumulative and includes all the cash advances received plus all the interest on them. However, clients have an option of paying down some or all of the interest annually but it’s not a requirement.
Kevin Zakreski, staff lawyer at the British Columbia Law Institute, said seniors should also consider a conventional mortgage or line of credit.
They might be taking on more debt than they want with a reverse mortgage, said Zakreski, who was involved in a report on reverse mortgages and seniors at the B.C. Law Institute.
“They are rising-debt loans,” he said. “It compounds on the whole amount,” he said of the interest.
“These are really loans that you will carry for a long time,” he said.
Zakreski also said seniors’ children need to understand what’s going on with a reverse mortgage.
“Problems can arise when the children become aware of it because that is their inheritance that can be substantially reduced.”
The Canadian Home Income Plan considers itself the leading, national provider of reverse mortgages. They’re available through most major financial institutions, mortgage brokers and financial planning organizations.
It has provided about 11,000 reverse mortgages valued at roughly $700 million since 1986, Bandler said.
Zakreski said the cumulative interest will eat substantially into the home’s equity, but CHIP says on its website that most homeowners have money left over when the reverse mortgage is repaid — on average 50 per cent of the value of the home when it is sold.
Interest rates are higher than those on a conventional mortgage. CHIP’s current rate for six months is 8.25 per cent, 8.6 per cent for one year and 8.9 per cent for three years.
Bandler noted the higher rates but said: “The most important aspect in my mind is that we don’t require any payments from the homeowner during the life of the home income plan.”
The fees involved are about $250 for an appraisal and a $1,285 administration fee, both of which are taken from the proceeds, Bandler said.
The out-of-pocket expense is for independent legal advice.
“We’re very transparent in explaining to people what it is they’re getting into, but we want to make sure that they understand.”
Zakreski said he favours Manitoba’s legal approach, which gives the consumer seven days to think about the transaction.
“They can’t move on the transaction for seven clear days from the time you get the disclosure package to the time you sign it and complete the transaction.”
© The Vancouver Sun 2006