The mortgage that grows

Reverse mortgages can destroy your home’s value

  66

by

From the December/January 2008 issue of the magazine.

  66

Canadians have seen their homes rocket up in value over the last decade and it’s hard not to let that sudden wealth go to your head. If your house is suddenly worth half a million dollars, why shouldn’t you use some of that equity to take a holiday, build a deck, or send your kids to a good school?

You’ve probably seen the TV spots offering you the chance to unlock your home’s value by taking out a reverse mortgage. You may have heard the “Wouldn’t it be nice?” refrain from CHIP Home Income Plan or seen ads from Seniors Money, a new player, and wondered if you too could tap into a little of your built-up equity.

At first glance, it’s a tempting proposition. But not after you read the fine print. If you take out a reverse mortgage for $200,000, you better enjoy that money while it lasts. Because in 15 years you’ll be in the hole for more than $600,000.

A mortgage in reverse

Taking out a reverse mortgage is like getting a loan that’s secured by your house. You have to be at least 60 to qualify, but as long as you stay put, you don’t have to make any payments. You can use the money for anything you want. Since you’re essentially taking out all the money you put into your house over the years, you don’t have to pay taxes on the cash or worry about having your Old Age Security or Guaranteed Income Supplement clawed back.

Advocates of reverse mortgages say these deals let you maintain control of your home. You can’t be forced to move or give up your home, and you never have to pay back more than your home’s value. But if you do decide to move for any reason, then the full amount of the loan plus years of interest becomes due. That’s when the situation can get scary.

There’s no going back

If you were 72 years old and owned a detached home in Toronto worth $460,000, you could borrow up to about $200,000 in cash from the CHIP Home Income Plan, which is currently the main provider of reverse mortgages in Canada. The problem is that CHIP charges a very high interest rate on that loan, and it’s compounded twice a year, with the interest payments rolled into the amount you owe.

That means your debt balloons quickly, and you can burn through your home’s value in less time than you think. In just 15 years you would owe more than $650,000. Unless your home increased in value at a higher rate than inflation, you would have pretty much completely devoured your home’s worth. When you die or move and your home is sold, almost all of the money would go to CHIP.

It’s rare that a home’s equity is completely devoured, according to CHIP, and if you’re not planning on leaving any money to your kids, you may not care if it is. But you should keep in mind that life can throw you some unexpected curveballs. For instance, if your health deteriorates 15 years into the plan and you have to sell your house and move into a nursing home, you would find yourself faced with a staggering debt and little left over to pay for health care. “Once you’re into a reverse mortgage, you can’t change your mind,” says Talbot Stevens, a financial educator and author of Financial Freedom Without Sacrifice. “It’s a permanent solution.”

Safer options

Stevens says a home equity loan may be a better solution.

In mid-November, most banks were charging 6.25% for such loans, compared to 8.75% and higher for the CHIP loans. It’s true that you have to pay the interest on a home equity loan every month, but Stevens says you can just borrow a bit more than you need and pay the interest with borrowed money as you go.

Such loans make sense if you want to go on a big trip shortly after retirement, or you want to do some home improvements, and you’re prepared to pay back the loan in a few years. A reverse mortgage also lets you pay back the loan at any time, but a home equity loan gives you more flexibility and you won’t end up $650,000 in debt on a $200,000 loan.

There’s one final option, and it’s the only true way to unlock all of the value in your home: Sell it. Many people have an emotional attachment to the place in which they raised a family, but there’s simply no other way to get half a million dollars out of a half-million dollar home.

Yes, you’ll have to move to a smaller place, but you can invest the profits from the sale so that you’ll have a nice place to live and some extra income too. Best of all, you’ll be in a more secure position, because you’ll have a nest egg to deal with surprises. And if the kids complain that now they have to host Thanksgiving? Just remind them of the alternative. You’ll be amazed by how quickly they come around.

66 comments on “The mortgage that grows

  1. Good post. I think the key is not to sell this sort of product to the wrong person. If you're more than 60, without children, it could be a good product. But people should be made aware of the dangers and the risks that come with such a product.

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  3. We were considering a Chip reverse mortage. But as I was looking into it I Emailed the representative here with a simple question as to how much money we would owe after 5 and 10 year periods, if we took out 100.000 in equity in our home. 3 times I attempted to get an answer and 3 times I recieved none. This bothered me, so I spoke with our bank and they suggested a reverse mortgage. And while there are interest payments monthly on the amount we have dipped into, at least you know where you stand. Chip only offers 40% OF THE VALUE OF YOUR HOME. This is because after 10 or 15 years the interest compounded semi-annually and the principal amount borrowed likely eats away close to 90% of your home's value. A wonderful deal for them, but terrible for the borrower. To us, it just made better sense to have a reverse mortgage with our Bank, because we know exactly what we owe at all times, and will not be shocked when we decide to sell our home.

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    • My concern with this program is they are reluctant to provide “all” of the details regarding initial costs to the applicant (I.E. what will you owe after being in the program for 5 years, 10 years or longer, what upfront fees are the total responsibility of the applicant …. such as home appraisal fees, what other fees become due “after” you are finally approved as in mortgage registration fees, actual costs to the applicant for the processing and documentation of the mortgage and any taxes that were deferred or owing at closure.
      Example, ask the “sales” rep this question based upon a home appraised at $530,000.00 with 100% home owner equity, applicant age of 68 with no secured credit against the home.
      I would be surprised to learn they will provide this information until they have their hooks into you as in you have paid for the Home & property appraisal, retained a lawyer and you are “fully” aware of all applicant costs?
      These fees can add up to over $2,000.00 and these amounts come out of the amount you have qualified for.
      Keep this in mind as whatever you qualify for and “think” you will be receiving you must deduct their fees from the total. Example; You qualify for $150,000.00 but you will not receive this amount as all of their fees as I previously mentioned come off the top of the amount you think you will receive.
      You pay for all costs and they sit back and take possession of your home and property and you find out (at the end of the term say in 10 to 15 years, you have given your home valued at 2015 prices of $500,000.00 to them for $150,000.00 ….. all of this is due to high interest charges and compounding interest you have agreed to provide to these shysters!
      Having said all of this we are still considering the program provided they can give us accurate fee & costs “before” becoming legally bound to them.

      Reply

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  56. You made some first rate points there. I searched on the web for the issue and found most individuals will associate with along with your website.

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  57. This article confirms what I have suspected for some time. I think CHIP’s TV commercials border on misleading advertising and a suitable complaint should be filed with the Competition Bureau of Canada.

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  58. Your article should mandatory reading for all grade ten students and above. Those people who publicly endorse reverse mortgages must be demented or well rewarded.

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  59. I would strongly suggest any one thinking of a reverse mortgage from chip, to get ready to be ripped off. These people are preditors and the reason they only lend up to 55% of your homes value because their interest charges gobble up the rest of your homes value. You are far better off to get a line of credit from your bank and make the interest payments monthly. Beware of these SOB’S.

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