September 25, 2020

Reverse mortgages an income lifeline for some seniors

By Denise Deveau, For Postmedia News
Kathleen Schooley’s story is not an unusual one for seniors. Widowed four years ago, the 76-year-old Osoyoos, B.C. resident found it was a struggle to make ends meet, despite the fact there was no mortgage on the house she lived in.

“It’s so much easier living on two sets of income. I don’t think people realize what a difference it makes when half of that money is gone.”

She adds that since she and her husband ran a sporting goods store in Kitimat before retiring, there wasn’t a huge pension to draw from.

For Schooley, the answer was a reverse mortgage through CHIP (Home Income Plan) HomEquity Bank. She is using the funds which amount to 40 per cent of the value of her house to make some home improvements, travel and generate additional investment income.

A reverse mortgage is a viable way for seniors 55 and over to use up to 50 per cent of their home equity to create a source of income. Percentage caps vary depending on the age of the applicants and property values, says Robert McLister, editor of Canadian Mortgage Trends in Vancouver.

“It’s a pretty streamlined process, because you don’t need to confirm income, and there’s no concern about credit ratings because you’re not necessarily making payments. So it’s a heck of a lot easier to get approved.”

The fact that the house needed some upgrading was one of the reasons Schooley looked into a reverse mortgage. “It was the ideal way to get me over the hump of going farther and farther into debt,” she says. “And there was no way I could get into refinancing because I would still have to continue to make mortgage payments every month. This way I don’t.”

For John Butler, a home-based consultant in Markham, the reverse mortgage scenario was the right fit for paying off some debts and getting the funds to renovate a second property in Grey County in preparation for his retirement. “Our intent is to get it fixed up and move from here over the next couple of years,” he explains.

Since he didn’t have readily available cash without having to sell one of the homes, the CHIP reverse mortgage was his go-to solution.

“The nice thing about it is the flexibility,” he says. “We can pay or not pay, which is very helpful in case of rainy days. You can always miss payments. It just comes off the resale value of the house.”

McLister notes that many seniors on fixed incomes would likely not qualify for a regular mortgage. The only other alternative would be a line of credit. With the latter they could easily get in over their heads if they borrowed against the home equity and property values go down.

“In either case, they would still have to make monthly payments. And the banks can easily shut off the tap if you miss a payment or a spouse dies. In those cases, CHIP is a good option.”

A reverse mortgage is more expensive – interest rates are typically two per cent above traditional variable rate mortgage rates, McLister notes. “You’re paying a premium for the ease of getting the money and lack of qualifications, and because the lender is not getting the money back in the short term. The money is typically only recouped upon the sale of the house.”

He cautions that while reverse mortgage holders can make payments if they choose, there may be penalties if they do it within too short a time frame.

Despite the extra cost, the big appeal of this approach is that it’s a way to help seniors stay home longer, he adds. “When they’re backed against a wall and have no other ready source of income and want to stay in the home, it’s a valuable option for a lot of people.”

Schooley says there’s one essential thing to take care of however before jumping into a reverse mortgage, and that is, to make sure the family is okay with the decision. “I was fortunate enough that my children had no objections. It could make it very nasty if family members don’t approve.”

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