COMPOUND INTEREST MOUNTS UP:
HUGH ANDERSON
Province
If you are finding that your cash flow isn’t sufficient for your needs, a reverse mortgage on your long-paid-for home may be the answer to your problem. — CANWEST FILE PHOTO
You are a retired senior age 60 or over who is receiving sufficient income to get by. You own a home that you bought with a mortgage that has been paid off.
The market value of the house has risen a lot over the years, which is good. But how are you going to pay for that new roof, and those darned property taxes that keep going up?
Suppose you could make a deal in which you remortgage the house for a part of the value, but don’t have to make any payments either of interest or on the loan itself if you choose. Now that’s the kind of mortgage you could have used when you first bought your house in those struggling years long ago.
What’s the catch, you ask sensibly? The trade-off for the deal is that the interest on the loan is tallied up and added to the amount you borrowed. This could mean that the value in your house is eventually wiped out.
This won’t matter to you directly, because you or your spouse or partner can stay in your house as long as the two of you live, although it may matter to your children or grandchildren because the entire amount of the loan, principal and interest, will have to be paid from your estate. You also have to be prepared to stay in the house. The money comes due if you sell the house, perhaps to move into a smaller residence. That goes for your spouse, too.
You are going to hear a lot more about this sort of deal. A new competitor is entering the Canadian market, challenging the long-established provider of reverse mortgages.
CHIP, short for Canadian Home Income Plan, set up shop in Vancouver 21 years ago. The new kid on the block is Seniors Money Canada, an arm of Seniors Money International. The parent set up shop in New Zealand about three years ago.
It’s added Australia, Ireland>, Israel, South Africa and Spain since. Now it’s trying its hand in Canada, starting with Ontario and planning to go national next year.
You can take the loan as a lump sum or in periodic income payments, and the money is not taxable.
Both organizations insist potential borrowers get independent legal advice before signing up, and pay for it themselves so that it really is independent. This is a good thing, because you do have to give up a lot to get the money. It’s also a difficult arrangement to get your head around when first encountered.
In particular, you have to realize that compound interest can mount up dramatically, especially when it’s not as visible as when you are actually paying it.
So is this arrangement worth considering? Only if you are not able to take on a regular bank loan or line of credit secured by the value of your house and make the regular loan payments.
Think of a reverse mortgage as a last option when you have value tied up in your house but not enough cash flow for your needs.