Tapping in to house equity works — for some
Kevin Greenard and Keith Greenard
Province
If you’re a senior with cash-flow problems and you don’t plan on moving out of your home in the near future, a reverse mortgage may be for you. — CANWEST FILE PHOTO
VICTORIA — What are the options for retired people who become house-rich and cash-poor? The first thing that comes to mind is usually a reverse mortgage.
But few people know what they are and when they make sense.
Reverse mortgages are residential first mortgages secured by a specific property and offer individuals older than 60 a means of converting a portion of the equity in their home into cash.
With a regular mortgage, interest and principal payments are made on the original amount borrowed. With a reverse mortgage, individuals may request an amount based on the equity in their homes. No interest or principal payments need to be made until you move out of or sell the home.
Reverse mortgages are offered through the Canadian Home Income Plan Corp.
CHIP began operations in B.C. in 1986, before moving into Ontario in 1996 and the rest of Canada in 1998 and 1999. From CHIP’s website, www.chip.ca, you can obtain the following information:
– You can receive between $20,000 and $500,000 from your home equity. The specific amount is 10 per cent to 40 per cent of the current appraised value of your home, based on your age and that of your spouse and the location and type of home you have.
– Current interest terms are: six months 7.5 per cent, one year 8.25 per cent, three years 8.60 per cent.
– Annual discounts are available after three years and balance discounts are available if the outstanding balance on your CHIP home income plan exceeds $100,000 or more.
– Set-up costs that the home owner pays are approximately $675, which is an estimate of the independent home-appraisal costs and independent legal advice.
– In addition, closing costs of $1,285 are added to your CHIP home income plan.
– You have the option to repay in full at any time. When you repay, an interest differential may apply (limited to three months’ interest). If you repay within the first three years, a prepayment amount will apply. These may be waived or reduced in the event of death or a move to a long-term-care facility or retirement residence.
The CHIP plan is voluntary and provides a unique opportunity for individuals to stay in their homes while enjoying retirement. It may be difficult for some individuals to see this component of their equity diminish.
But a CHIP plan may be a way to have your cake today and eat it, too.
BASIC STRATEGIES TO ASSIST INDIVIDUALS IN STAYING IN THEIR HOMES
1. While you are still working and eligible to qualify for a line of credit, do so prior to retiring. We also recommend you apply for the maximum limit that you can qualify for. Having this in place may provide you the flexibility of drawing only what you need at retirement (i.e. $500 per month). The interest rate charged will likely be more competitive than a reverse mortgage.
2. If you’re older than 60 and cash flow is a concern, you may want to consider the property tax deferment program.
3. If you are running low on retirement funds you may want to consider interest-only payments on certain debts such as your line of credit. Making interest-only payments on debt that has a reasonable interest rate may provide the necessary capital to prolong the stay in your home.
4. Peace of mind at retirement can certainly be enhanced in the absence of financial concerns. Sometimes downsizing into a smaller home may provide the necessary capital to fund retirement expenses.
5. Utilizing a reverse mortgage is always an option. The CHIP plan does provide individuals the ability to stay in their homes longer, but at a cost.
Anyone interested in a reverse mortgage must seek independent legal advice. On a cautionary note, people who are interested in a reverse mortgage should also consult with their investment adviser or accountant to determine if a reverse mortgage is the best strategy and if it makes sense for them.
— Keith Greenard and Kevin Greenard are members of the Greenard Group at ScotiaMcLeod in Victoria
© The Vancouver Province 2006
