“This leaves a current balance of $204,939, with interest owed at 25% of the outstanding balance after just five years,” Ardrey said. “As time goes on, this can exceed the entire value of the home. Thankfully, they realize that there is no unfair equity, but there is not much left at the end of the day for the home owner or their heirs. ”
Heath points to the fact that reverse mortgage rates are often much higher than conventional sources. “A borrower can expect to pay at least a few points more than mortgages and lines of credit. But if you read the fine print on your home equity line of credit agreement, the lender usually has the right to reduce your limit or call off the balance you owe.”
Therefore, homeowners should not count on their HELOC being available when they need it.
Currently, variable mortgage rates are in the 9.5% range, while five-year mortgage rates are around 6% and five-year mortgage rates are around 5%. HELOC rates are typically 1% above the regular rate, so currently they are around 7.95%. “Of course there is a fee to be paid to get the loans back,” said Heath.
Ardrey raises another concern: how retirement health care can be paid for. “Most of the time, the house can be sold when the old person lives on pension, which enables him to pay for this plan. In this instance, the ability to use the home for this purpose will be greatly impaired. ”
He suggests that instead of taking out a reverse mortgage that could jeopardize their financial future, retirees need to take a serious look at their situation and the lifestyle they can afford. “While it may not be best to sell their home and live elsewhere, it may also be their financial reality. This speaks to the importance of early planning to avoid being home rich and cash poor.”
What are the alternatives to a reverse mortgage for Canadian retirees?
Allan Small, senior investment advisor at IA Private Wealth Inc., says reverse mortgages “have not played a part in any of the retirement plans and retirement planning I've done so far in my career. I think the reverse mortgage idea or concept, for whatever reason, hasn't caught on. ” And, “those individual investors that I see usually have money to invest, or have already invested. Many downsize their living space and cash out that way by cashing out on the property while they live in it. ”
Finance professor and author Moshe Milevsky told me by email, that when it comes to refinancing a loan-or any other financial strategy or product in the downsizing area-“I always ask this question before giving an opinion: Compared to what?” He is concerned about the relative interest rate risk, which is “difficult to control, manage or understand over the years and the decline of the mind.”
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