What are Reverse Mortgages?

"It just might be the income boost seniors could use"

Trudy Don-Hughes' house was falling apart. It needed a new roof, eavestroughs, electrical work and a paint job. "It was so bad, you could take a shower while going to the bathroom, because the roof leaked so much," she says. Although her home was worth $350,000, like many seniors, she didn't have the cash to pay for the repairs.

The 69 year old divorcee considered selling her home and moving into a smaller condominium or townhouse, but knew it would never accommodate the many family dinners and functions that come with nine children and 11 grandchildren. "Besides," says Don-Hughes, "I have lived in this house for over 20 years. This is my home. I couldn't just sell it."

Instead, Don-Hughes took out a Canadian Home Income Plan (CHIP) Reverse Mortgage. The $101,000 lump sum payment enabled her to payout her existing mortgage of $60,000, eliminate $8000 in credit card bills, spend $20,000 on those much needed repairs and still have a little left over to put into GIC's. "The reverse mortgage gave me a real sense of security", she says.

Reverse mortgages are not new, in fact, they have for around for 50 + years in the United Kingdom and 20+ years in the USA. In Canada, the reverse mortgage has been helping "house rich, cash poor" seniors such as Don-Hughes for over 10 years.

How does a Reverse Mortgage work?
Essentially, it works much like a traditional mortgage only in reverse. Instead of you making payments to the lender each month, in a reverse mortgage, the lender pays you. You can unlock 10 - 40 % of your home's market value (the amount depends on your age, marital status and current interest rates). You may take the proceeds as a cash lump sum, guaranteed monthly payments or a combination of these two methods.

With a CHIP reverse mortgage, the principal amount of the mortgage loan along with accumulated interest is not due until you pass away or sell your home. You do not have to make any monthly payments, however, you do have the option of paying out the mortgage earlier if you wish.

An Option for Seniors with Adequate Income?
"House rich, cash poor" may describe some seniors who could benefit from a reverse mortgage, but many have adequate income to fill their needs in retirement. "We have seen a quite a change in the ways many of our clients are using a reverse mortgage," says William Turner, President and founder of Canadian Home Income Plan. "Originally, we designed this program for those seniors who could not make ends meet and who had trouble maintaining their monthly expenses. But today, the "house rich, cash poor" senior only makes up approximately 20% of our clients." Turner says over half of their current clients are using the CHIP reverse mortgage for the extras in life. "These people have enough money but they want to buy a new car, visit their family in other parts of the country, or travel to interesting places."

Some seniors want to pass the money to their children so they may purchase their house, or start a business. In some instances the money has been passed to the grandchildren to help with university tuition. This "early inheritance" not only helps the recipient but you are able to see the benefits of your estate at work.

Reverse Mortgages and Revenue Canada?
Reverse mortgages can also be used in estate and tax planning. A CHIP client who was receiving income from GIC's cashed them in and replaced it with annuity income from the reverse mortgage. In doing so, he eliminated a taxable income stream and replaced it with a virtually non- taxable income stream. The Canadian Home Income Plan reverse mortgage has a ruling from Revenue Canada which considers income from a reverse mortgage taxable but, the interest that accumulates on the mortgage loan is deductible and generally offsets any tax payable.

"If your main concern is to leave the entire amount of your estate to your heirs, then a reverse mortgage is not for you," says Turner, "If could use some extra income and do not want to sell your home to get it, a reverse mortgage may be just the thing."

More information on CHIP reverse mortgages is available by visiting your local Mortgage Broker or by visiting any branch of TD Canada Trust or Royal Bank.