Posted by: Daryl & Wendy Ashby | November 4, 2010

Reverse Mortgages

The biggest selling point of reverse mortgages is that there are no interest or principle payments, which makes the loans attractive to seniors who are house-rich but cash-poor. Another plus is that the maximum borrowers ever have to repay is the fair market value of their home. So they’ll never default or have to dig into other savings to repay the loan.

“They can stay in their home for as long as they want,” says Steven Ranson, president and chief executive officer of HomEquity Bank. When they die or move, “they can never owe more than the house is worth.”

Isn’t HomEquity Bank taking on a lot of risk by capping the borrower’s obligation? Not really. It lends a maximum of 40 per cent of the home’s current market value, and clients typically stay in their homes for eight to 12 years. That, coupled with rising property prices, means the sale proceeds are usually more than adequate to cover the outstanding loan balance.

Borrowers can choose to pay off their interest annually, which qualifies them for a half-point reduction in the following year’s interest rate. Less than 5 per cent of clients use this option, however.

“The product is actually designed for people who can’t afford to make the interest payments,” Mr. Ranson says. “What I would say is, if you can afford a regular mortgage and you can afford to make the payments, then go get one.”

The alternatives

Financial planners recommend looking for cheaper sources of funds before taking out a reverse mortgage.

“I think a secured line of credit would provide a much lower cost of borrowing and greater flexibility,” said registered financial planner Derek Moran, president of Smarter Financial Planning in Kelowna, B.C.

Another option is to sell your home and downsize to a less expensive property, freeing up cash to pay for living expenses or to invest in income-producing securities.

For Mr. Lauzon, that wasn’t an option. His mother was determined to stay put in the home she shares with her twin sister, so he used the loan proceeds to pay for the new roof, some electrical repairs and safety handrails in the bathroom.

“The whole process took a little bit of time, but in the long run, it relieved a tremendous amount of stress,” he says

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