June 11, 2008--Caution re: Reverse Mortgages

Greetings!

You may have seen the TV ads for reverse mortgages showing very happy seniors enjoying their new-found money. It's promoted as the "CHIP program." A reverse mortgage, as the name suggests, is a way for seniors to get a lump-sum, tax-free payment based on equity that they have in their home. As you can imagine the payment creates a debt against the house. And, because the senior typically makes no payments against the debt, the debt grows quickly due to the accumulating interest owing.

Now, one might expect that the interest rate charged on this debt, by CHIP, might be comparable to mortgage rates [e.g. for a mortgage, the current fixed 5-year discounted rate is 5.25%]. Unfortunately this is not the case. The current fixed 5-year rate on the CHIP loan is 8.6%**. That's high. And at 8%, for example, the size of the debt to be repaid will double every 9 years.

Imagine, then, a senior pulls out $100,000 at age 65. By age 83, the debt will have grown to $400,000 [which is typically collected by CHIP when the house is sold]. To be fair, the house should rise in value over those 18 years, but the bottom line is that the CHIP interest rate is high resulting in a compounding growth of the debt that can become painful to the senior and the family.

If you know of anyone contemplating a reverse mortgage, my advice would be for that individual to get an expert, second opinion and to explore alternatives to the reverse mortgage. Only then can an intelligent decision be made on the merits of the reverse mortgage for that individual.

Cheers!

Tom

**RATES AND FEES TO PARTICIPATE IN THE CHIP PROGRAM--"There are some set-up costs. The fees for an independent home appraisal are typically $175 to $400. The amount varies by province and whether you're in an urban or rural area. Fees for independent legal advice are typically $300 to $600. In addition, legal & closing costs of $1,485 are deducted from your CHIP Home Income Plan funds so they are not an out-of-pocket expense." [see details at http://www.chip.ca/index.cfm?id=100&language=english ]

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd