April 15, 2011
An In-Depth Look at the Canadian Reverse Mortgage
Gauging the Suitability of a Home Income Plan to Meet Your Retirement Income Needs
It is an unfortunate reality that many Canadian seniors will find themselves amid retirement short of the funds needed to cover the debt load that followed them, or their current monthly expenses. According to Financial Post reporter Jonathan Chevreau, more than 33,000 Canadians over the age of 60 filed for bankruptcy between 2008 and 2010. A reason suggested for this large spike in senior bankruptcies was the bottoming out that occurred in the stock market. Many seniors hold stocks within their RRSPs or RRIFs.
In a study conducted by Industry Canada only 16% of Canadians over the age of 55 who had declared bankruptcy reported the cause to be job loss.
Debt load is a major danger. Retirement is an era of your life where generally less income will be at your disposal than it was when you were working. Making minimum payments to creditors only leads to a larger piling and accumulation of interest debt. While it is difficult for the majority of creditors to garnish pension income, the Canada Revenue Agency can. If you enter into retirement owing back taxes, the CRA could garnish your Canadian Pension Plan to recover the amount owing.
These statistics seem to indicate that regardless of how well you may think you are investing or putting aside funds toward retirement, there poses a high chance these funds may not cover all the expenses you come into retirement with.
The reverse mortgage is a valid option to consider when debt load is appearing to exceed current income generations. If you are a senior homeowner who intends to stay residing in that home, a reverse mortgage can free 10% up to 40% of the property value tax-free for you to allocate as necessary.
The reverse mortgage does not require you to make any re-payments so long as you or your partner reside in the home, and the equity you take out can be administered in one lump sum payment or in several installments.
Different term lengths and rates are available – from six months to 10 years – and different payment options. A 0.5% rate reduction may be granted the following year after the current year’s full interest accrued is paid.
Even if you still carry a mortgage balance, a reverse mortgage can be attained. The only out-of-pocket expenses include appraisal and independent legal fees, the total of which will range from $450-$1,000. The standard fee to initiate the product is $1,495, which can be tacked onto your loan. The reverse mortgage does not need be repaid until both spouses have moved from the home or passed away.
Many seniors report positive outcomes from having attained a Canadian Home Income Plan (CHIP). The reverse mortgage has allowed some to pay off outstanding property tax and keep their home, and others to clear outstanding high interest debts and remove creditor harassment from their lives. Some seniors have used the product to pay for home care after a debilitating disease diagnosis, or to fund travel, hobbies, family businesses or help out children with their tuition or down payments.
There are some concerns surrounding the reverse mortgage one should be cognizant of too. Though the majority are paid in full with the sale of the home and leave proceeds remaining, in a minority of situations that is not the case. If the value of the home depreciates, and interest has been stacking up, sale of the home may only just cover the debts left on it, or even leave debt remaining. In Canada the real estate market has tended to hold steady. In the United States, however, many saw the values of their homes dramatically drop, suddenly owing in excess of the current market worth.
In any case, when income is necessary to make your retirement comfortable or help you to keep your cherished home, the reverse mortgage is an alternative to selling the home, living off credit or slipping into bankruptcy. Talk to your mortgage broker and seek independent advice to be sure you attain the best financing for your unique situation.
Article provided by CanEquity.