The retired owner still feels a little uncomfortable using the equity of his home to meet a liquidity need. It is also true that even if recent years have seen a marked increase in property values, the sharp rise in mortgage rates has attenuated its impact. This may be particularly the case for reverse mortgages.
A blog from Financial Post take a look at a survey conducted for the Canadian Financial Planning Foundation (FCPF). We observe that 42% of respondents say they are rather uncomfortable with the idea of drawing on the equity of their property in order to increase their income or their standard of living. The reasons given range from lack of knowledge of the product, to what their friends and family members will think, to a concern for the legacy left behind. This, however, does not prevent many of them from affirming that it is “highly likely” that they will want or need to access the equity in their property.
Indeed, inflation is eating into their ability to save, and a high number of respondents doubt whether they have enough money to cover their retirement years. Meanwhile, residential property values have skyrocketed, adding significantly to homeowners’ assets. A reality that is however undermined by the sharp increase in interest rates.
The traditional financial planning exercise generally excludes assets stored in home equity. But for many owners, particularly those without significant assets, this equity can represent a greater asset than their retirement capital.
The options
The FCPF also cites research conducted by researchers at the University of Lethbridge, in Alberta, and Virginia Commonwealth University in Richmond, on Canadians’ resentment of reverse mortgages and home equity lines of credit. The list of options offered ranged from getting a second mortgage, remortgaging, selling and buying a smaller property, selling to rent again, or renting out. part of the house.
Responses from the group whose average age was 54 found that 36% said they were very comfortable using home equity to fill a liquidity gap, compared to 29%. stating that they would not be tempted to do so. But the idea of using it to fill a need related to health care was widely accepted.
Of the options presented, approximately half of the respondents gave their preference to the sale accompanied by the purchase of a smaller home, while 20% placed the mortgage line of credit in first place, 15% pointed towards the reverse mortgage and 11% towards the rental of part of the house.
But what is a reverse mortgage?
Generally defined as a niche product and presented as a source of liquidity of last resort, the reverse mortgage is increasingly part of what is called the retirement capital pool. Especially since, for many seniors, the main residence represents the majority of their assets. Its main advantage: borrowing against the value of the property without having to make regular payments, the mortgage payment being capitalized and increasing the amount of the loan. The lender is repaid when the owner leaves their residence. Other advantages: Neither the borrower’s credit quality nor their ability to pay are issues. The possibilities of default are limited, linked in particular to a lack of maintenance which lowers the value of the property.
This sum, which constitutes a loan, is tax-free and in no way affects the guaranteed income supplement and other payments from public retirement plans. If this sum generates additional taxable income, the interest paid on the loan is deductible. Additionally, the lender does not require a credit check or income qualification.
The mathematics is simple. The institution lends up to 55% of the property value. Subsequent advances are possible, within the authorized limits. The amount granted takes into account the age of the owner(s), location of residence, condition of the home, its appraised value, the type of property and market conditions or trends. Typically, the older the borrower, the higher their loan-to-value ratio and, generally, the higher the equity in the home, which results in a larger loan made. says the Financial Consumer Agency of Canada.
As for the risk of seeing the mortgage become greater than the value of the property, it depends on the gap between the increase in the value of the asset and the compound interest resulting from the capitalization of the payments. With an average loan rate of 35%, there is room. Also, this risk is paid for in the form of a mortgage rate that is generally higher than that on a traditional mortgage.
As for the constraints… The residence must be free of traditional mortgage or mortgage line of credit, which may involve discharge fees, if applicable. Also, the mortgage rate is higher and all of this comes with upfront costs. These include fees associated with the appraisal, legal opinions and closing costs associated with the title search, title insurance and loan recording. Finally, penalties associated with early repayment may be required.
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2023-10-21 04:16:18
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