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A REVERSE MORTGAGE, IS THIS YOUR BEST OPTION?
Wayne Taylor P.R.P.

Reverse Mortgages have been in Canada since 1986. Since then, sales of Reverse Mortgages have been steadily increasing. I have been watching this product growth with interest since they were introduced. Almost all of the print, TV and web site advertising has been on the positive growth and benefits of this product. Very little is written about who should and should not consider this option in great detail. The purpose of this article is to give the retiree the pro and con's of using this strategy.

THE FOLLOWING ARE THE FACTS ABOUT REVERSE MORTGAGES:

• You must be age 62 or older, own your own home and be mortgage free.
• The lender will advance you funds based on 10% to 45% of the appraised value of your home.
• Fees for a Reverse Mortgage can be up to $1700.
• The requirements to qualify are based on your assets, not your income. You can be asset rich but cash or income poor.
• You and your spouse must stay in your home to qualify. If you do not, the loan is called.
• You do not have to make payments for the loan. The financial institution takes on the risk of the eroding value of your home.
• The loan interest rate is higher than conventional loan rates -The equity that you take from your home is tax free.
• As a rule of thumb, the debt will double every 7 to 8 years based on current interest rates. Therefore, if you ever want to pay off the loan and sell your home to do other things, keep an eye on the debt to equity spread of your property.
• I believe that a Reverse Mortgage should be the last not the first option when the retiree needs cash.
• Major centers are best suited for this product. Rural Canada is less attractive for this product due to the growth rate of real estate. Administration costs may also be higher to manage the rural clients as well.

THE FOLLOWING DESCRIBES THE KIND OF PERSON WHO IS BEST SUITED FOR THIS STRATEGY:

• House rich and cash poor. You want your home and the money.
• Age 62 plus.
• I believe that you and your spouse should be in good health. Poor health is one reason you may be forced from your home. The financial institution will cancel the deal based on this event.
• You and your heirs do not mind the equity being eroded in your home.
• If having the equity eroded is an issue, you could life insure this debt to keep the estate value at the level you need.
• You do not qualify for a traditional loan.
• You do not wish to make loan payments.
• The cash taken from your home can be used for personal use or purchase an annuity to provide income.

WHAT ARE SOME OF THE ALTERNATIVES TO USING A REVERSE MORTGAGE?

• A line of credit or home equity loan with your home as collateral. You could pay interest only if you chose. You will need adequate income to qualify for this option.
• Do you have other assets that can be sold to meet your cash needs?
• Can a friend or family member lend you the cash you need and you make them the beneficiary in a life insurance policy or give them a collateral assignment on your home. When you die or sell the home, they can be repaid back with interest.
• Do you have more home than you need? If so, sell it and buy a smaller home. Use the balance of the equity to meet your cash needs.
• If the reason you need cash is because of lifestyle choices or a spending problem, will the problem go away just because you use a Reverse Mortgage?
• Do you have marketable skills that can generate enough income to meet your cash needs? A working retirement solution is very common in Canada for many reasons.
• Have you brainstormed for ideas with your family members, friends or your financial advisor to come up with other creative ideas to meet your cash needs?
• Can your current investments be improved to provide you with the cash you need? As long as you can stay within your risk comfort level, this may be worth exploring.
• If this is a short term solution, i.e. a small home improvement loan that could be repaid out of income, this may be the best solution. If however, if it is long term, the cash need is larger and the ability to make loan payments is not feasible, then the Reverse Mortgage may be the best solution.
• Would selling an old home that is too expensive to maintain and buying a new home with lower maintenance a better solution? Develop a few scenarios.
• Can you rent out the basement to provide rental income?
• Have you explored all the Housing Assistance for Low-Income Seniors Programs? (Federal & Provincial).
• Reverse Mortgage sellers point out that when you borrow the funds and reinvest the proceeds, the interest is tax deductible. This is correct. However, the interest is also tax deductible if you use a line of credit. Same goal, different strategy.
• Think outside the box for creative solutions. They do exist deep in your mind. I always believe that those closest to the problem are closest to the solution. The financial institution is only selling one solution, you may have many more.

QUESTIONS TO ASK BEFORE USING A REVERSE MORTGAGE:

• Request a written forecast of this loan compared to a reasonable real estate growth rate for 30 to 40 years. The goal is to see the impact of the loan compared to the equity growth.
• Ask for a copy of the Reverse Mortgage agreement before signing up for the plan. Review this with one of your advisors.
• Is this a lifetime plan that is repayable when you die or leave your home or a fixed term loan that is repayable at a specific period of time? (i.e. 3 years)
• Under what conditions can the financial institution call the loan? Also, how quick the loan must be repaid. I.e. if you are forced to repay the loan, how much time do you have to sell the home or come up with the cash?
• What are your pre-payment options?