Using home equity for a reverse mortgage is an option when pension income isn't enough
By Terrence Belford, For Canwest News ServiceMarch 30, 2010
Inge Hahn and her husband Ben received 40 per cent of their home equity in a reverse mortgage.
Photograph by: Peter Redman, Canwest News Service, For Canwest News Service
Inge Hahn can hardly contain her relief and excitement. After years of worrying about the rising cost of living and diminishing pension income, the 72-year-old and her 73-year-old husband now have a large chunk of cash to see them through.
In January, the pair obtained a reverse mortgage on their Orrville, Ont. home. It took just three weeks from the day she made that initial call to Home Equity Bank, the only source of reverse mortgages in Canada, until she had a cheque for $143,000 in her hands.
It represented 40 per cent of the equity she and her husband Ben had built in their lakefront home, but at an interest rate of just 3.75 per cent she figures rising house prices are likely to more than make up for any loss of equity by the time she and Ben die or have to move.
Unlike a bank loan or a conventional mortgage she faced no monthly payments. Interest and principal just add up year after year and only come due when they no longer occupy the home.
"I am on Cloud 9," she says. "You can't imagine what a relief this is for us. Our pension income just did not cover the bills any more. Now we can do all the things that need doing and have money left over to invest and provide extra income."
The Hahns are one of 7,000 customers who have gone to the Home Equity Bank since it started as the Canadian Home Income Plan (CHIP) in 1986, says Greg Bandler, vice-president of sales and marketing. The bank holds more than $1-billion in reverse mortgages.
"And business is booming," says Bandler. "One of the chief reasons is that since we became a schedule 1 bank on Oct. 13 last year we have been able to reduce the interest rates we charge considerably. We are now competitive with conventional mortgages.
"The second is that because of the recession and historic low returns on investments may Canadians are finding their pension income is just not what they need. To make it go further they are tapping into their equity of their homes."
Becoming a bank and having access to inexpensive money to fund reverse mortgages -- mainly through the sale of guaranteed investment certificates, which it sells through 50 other banks and institutions -- has suddenly made the CHIP program a reasonable alternative for seniors, say mortgage brokers across the country.
"I never saw the value of them in past," says John Panagakos of The Mortgage Centre, Toronto. "In the past, the rates charged have been extremely high, but now that they have come down I may have to reconsider them."
"I can see how they may make sense for some people now that rates are competitive," says Ajay Soni, senior broker with mortgage lender Invis in Vancouver. "But I still don't see them as a mainstream option for most seniors."
The sweet spot for Home Equity Bank seems to be seniors aged 72 or 73, says Bandler.
"They have rolled their RRSPs into RRIFs and found the income generated is short of what they need to live and pay normal bills," he says. "They come to us because this is tax-free money and can be used to provide that much-needed retirement income."
The CHIP plan is available to any homeowner aged 60 and over, Bandler says. They can borrow up to 40 per cent of the equity in a home and not face repayment until they die, sell or move.
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