March 17, 2018

Pros and Cons of Reverse Mortgages

By William Fraser from information provided by Paul R. Foisey, LLB

Once again last evening there was an advertisement on television about how to free up some tax-free money by applying for a reverse mortgage or CHIP. With this kind of mortgage, the equity in your home provides a source of money to be used any way you wish.

The question is, is this too good to be true? The Pension and Financial Wellness Committee asked this question of a lawyer, Paul R. Foisy, LLB, and it is with his permission that we list the pros and cons of such a program.

Pros

  • Allows for possible earlier retirement.
  • Allows for a better quality of life as a senior.
  • Allows for possibly needed renovations to stay at home longer.
  • Must seek independent legal advice to obtain this mortgage.
  • No obligation to repay principal or interest while living in the home.
  • Estate is not liable for more than the value of the home (no deficiency possible)
  • Can allow for consolidation of higher interest rate debts (credit cards).
  • Allows for lump sum payment, monthly payments or periodic advances as needed.
  • Cannot borrow more than 55% of the appraised value of the home at the time the mortgage is taken.
  • Money is tax-free.
  • Depending on interest rate fluctuation over mid- to long-term, rate fluctuations associated with home equity lines of credit can be avoided.
  • Surviving spouse can also assume the mortgage if still living in the home.

Cons

  • Typically carries a higher rate of interest than a conventional mortgage.
  • Eats up or reduces equity in what is usually your largest asset.
  • Might be a means to overlook overspending (bad debt) issues since no credit check is required.
  • Generally appeals to a more vulnerable sector of society.
  • If the borrower is forced to move to an assisted living facility, the mortgage becomes due with accumulated interest (this can also affect others living in the home).
  • Can result in added stress or burden on the estate.
  • A diminished gift left to heirs.
  • Set up or administrative fees added to the mortgage can be high and vary from lender to lender.

All in all financial decisions, we urge our members to consult with spouse and family before any decision is made. Be aware of what such an arrangement might mean if one or both of the couple are no longer able to live in the residence.

For more posts like these, visit the Pension & Financial Wellness Committee page.

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