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Published: Oct-2007
The Canadian Home Income Plan (CHIP) is the largest
vendor of reverse mortgages in Canada. A reverse mortgage is a cash
advance on the value of your home that accumulates interest. The
accumulated debt does not need to be paid off until you die, sell the home
or move out. If you are over the age of 62 and qualify, you can get up to
30% of the value of your home to do with as you please. This money is tax
free but if the money is used to invest and produce an income, then that
income of course will be taxable.
Now - the real cost of a reverse mortgage: The CHIP
website states that there will be an administrative set up fee of
approximately $1,300. You choose a term of between six months to three
years; this will determine the rate of interest on your loan, which will
be subject to change at the end of the term. Just like a regular mortgage
the interest is compounded semi-annually, but you are not making payments,
therefore the debt only grows and compounds more quickly.
To illustrate - if “HomeOwner” applies for a reverse
mortgage for 30% of the value of his $250,000 home, with a three-year term
at 7.5% interest, “HomeOwner” would receive $75,000 less a $1,300 set-up
fee to do with as he pleases. If “HomeOwner” is 62 years of age, he is
determined to have a life expectancy of approximately 24 years, so at 86
years of age, assuming there is no change in the interest rates, the
amount owning will have grown to over $439,000. If you listen to the ads
the amount to be repaid does not exceed the value of the home but in just
a few years, the equity that took many years to build up could be
completely gone. And of course if “HomeOwner” decides to move, the equity
from the home is no longer available when it is probably most needed.
There are much more economical ways to get money out of
your home: get a line of credit, downsize to a less expensive home, even
rent out a portion of the home for additional income. You may even be able
to use a Life Insurance Cash Value Policy to secure a line of credit – it
may even be possible to have the interest payments deferred until death.
So if you must stay in the home you reside in and you
do not like your children, a reverse mortgage would definitely be the way
to go.
If I can be of any help to you, your friends, relatives
or associates, please do not hesitate to
contact me. Your referrals are greatly appreciated. |
