Reverse Mortgage Loan Blog

You are a retired senior age 60 or over who is receiving sufficient income to get by. You own a home that you bought with a mortgage that has been paid off. The market value of the house has risen a lot over the years, which is good. But how are you going to pay for that new roof, and those darned property taxes that keep going up?

Like several readers, you’ve heard about something called a reverse mortgage - a way of turning some of the locked-up value in your house into spending money. There are other ways to cope, such as borrowing against the value with a home-equity loan. But that means adding payments to your budget, which is already rather tight.

Suppose you could make a deal in which you remortgage the house for a part of the value, but don’t have to make any payments either of interest or on the loan itself if you choose. Now that’s the kind of mortgage you could have used when you first bought your house in those struggling years long ago.

What’s the catch, you ask sensibly? The trade-off for the deal is that the interest on the loan is tallied up and added to the amount you borrowed. This could mean the value in your house is eventually wiped out.

This won’t matter to you directly, because you or your spouse or partner can stay in your house as long as the two of you live, although it may matter to your children or grandchildren because the entire amount of the loan, principal and interest, will have to be paid from your estate. You also have to be prepared to stay in the house. The money comes due if you sell the house, perhaps to move into a smaller residence. That goes for your spouse, too.

You are going to hear a lot more about this sort of deal. A new competitor is entering the Canadian market, challenging the long-established provider of reverse mortgages.

CHIP, short for Canadian Home Income Plan, set up shop in Vancouver 21 years ago. The new kid on the block is Seniors Money Canada, an arm of Seniors Money International. The parent set up shop in New Zealand about three years ago. It’s added Australia, Ireland, Israel, South Africa and Spain since. Now it’s trying its hand in Canada, starting with Ontario and planning to go national next year.

You can take the loan as a lump sum or in periodic income payments, and the money is not taxable.

Both organizations insist potential borrowers get independent legal advice before signing up, and pay for it themselves so that it really is independent. This is a good thing, because you do have to give up a lot to get the money. It’s also a difficult arrangement to get your head around when first encountered.

In particular, you have to realize that compound interest can mount up dramatically, especially when it’s not as visible as when you are actually paying it.

However, both providers guarantee that you can never owe them more than the fair market value of your house at the time you have to repay your loan. In addition, they will lend only up to typically 40 per cent of the value when you make the deal, so it will take a lot longer for the amount of your loan to mount up. You will also never be asked to sell or move out of your house in order to repay your loan.

Current interest rates at CHIP range from 8.7 per cent for a fixed term of six months to 9.3 per cent for five years. CHIP’s variable-rate deal is linked to bank prime rate and currently is 8.25 per cent. There is a program of discounts beginning at three years into the deal and for paying the full amount of the annual interest.

Seniors Money offers variable rates only, currently at 1.25 points over prime, or 7.5 per cent. It says the rate will never be more than two points over prime. Unlike CHIP, it charges no penalties for early repayment.

So is this arrangement worth considering? Only if you are not able to take on a regular bank loan or line of credit secured by the value of your house and make the regular loan payments. Think of a reverse mortgage as a last option when you have value tied up in your house but not enough cash flow for your needs.

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