GOING IN REVERSE
For most Canadians the biggest financial asset they'll ever get there hands on is their principle residence. Meanwhile, the vast majority of people have their mortgages paid off by the time they reach the age of 60. That means millions of people are sitting on billions of dollars in home equity, many of them living poorly because they have lousy pensions and inadequate government benefits.
Risk adverse seniors who want both financial security and the ability to stay in their own homes may consider a reverse mortgage. A reverse mortgage, provided by the Canadian Home Income plan (CHIP), may be a worthwhile option. The idea is simple: You are allowed to borrow money, tax-free; against the equity you have created in your home. You can use the cash to do whatever you want with, and there are no repayments so long as you stay in the home. If that sounds too good to be true, it almost is.
With a normal mortgage. A lender gives you money secured by your real estate, and then you spend the next twenty-five years paying it back, along with the interest compounding on the principle. If you take the full quarter century to repay, youll pay back about 3 times the amount that you actually borrowed. With a reverse mortgage, you receive money secured by your home, but there are no repayments. So what about the compounding interest? That is added to the outstanding loan amount, and it must be repaid when you sell your home. More on that in a moment.
Here are some of the significant features of a reverse mortgage:
*You have to be at least 62 years to qualify
*You can borrow between 10% and 40 % of the value of your paid up home, as opposed to up to 90% with a home equity loan or secured line of credit.
*The amount of money CHIP will give you is determined by your age, gender, marital status, and the value, location, and type of your home. The younger you are, the more you get. Women qualify for more then men. Freehold homes receive more then condos.
*There is a set up fee to pay of about $1700. As opposed to $300. To $500. In fees for a line of credit or home equity loan.
*Interest on the money you borrow compounds semi-annually, and is added to the outstanding balance, unless you decide to repay it once or twice a year. You also have the option of repaying the reverse mortgage at any time, but if repayment takes place in the first three years, expect a penalty.
*The rate of interest is set annually, as opposed to the constantly fluctuating variable rate on a home equity loan.
*The money you get is yours; tax free, since no capital gains are applicable on a principal residence. Which means it is not counted in your income. As a result, this will not affect eligibility for government benefits, such as old age Security.
*If you use the reverse mortgage money, or part of it, to buy investments that will pay you income, then some or all of the interest that compounds on the loan will be tax deductible in your hands, just as with a secured line of credit, or home equity loan. That can offset your income tax payable and increase your cash flow.
*There are no restrictions on how you can use your reverse mortgage money.
*However, to get it, there can be no outstanding loans, mortgages, or other debts, which are secured by your Real Estate. That also means property taxes, insurance, and condo fees have to be paid in full, and the property must be properly maintained.
*The title on the property remains in your hands, so you can sell or move whenever you want.
*The reverse mortgage lender has no right ever to force you to repay the loan in full, or to sell your home and move out.
So how do you pay this money back? Typically, it will come out of your estate- upon the death of the last surviving spouse. Or, if you choose to sell your home, repayment will be made from the proceeds of the sale. In the case of an estate, there can even be some benefit in reducing probate fees, since the principle and accrued interest is deducted off the top from the total value of the estate.
But
this is also the controversial part, because a reverse mortgage that
has been in place for many years can build up a substantial amount of
interest-, which can have a serious draining effect on your estate.
Should you be planning to pass along a lot of money to your kids, a
reverse mortgage may not be for you. If you hate your kids, however it's perfect .