House rich and cash poor turn to reverse mortgages

In many cases, it’s for aging Canadians who are house rich and cash poor. Take the case of 86 year old Christine Riley, of Thornhill, Ont., just north of Toronto.Ms. Riley [not her real name] has been a widow for 23 years and sold the family business about 20 years ago.According to her daughter, the “cash was running out.”The one thing she had going was a $1.5 million home on a 3.4 acre property that had been in the family for 45 years.

“She didn’t want to sell it or move. She’s been there 45 years. She’s got memories. She saw her children grow up there.She has a lot of memories associated with it. She’s feeling comfortable about it.It took a bit of weight off her mind and when you are 86 you shouldn’t have to worry about money when you’ve got a house worth that much,” says Ms. Riley’s daughter, Gretchen.

The reverse mortgage also gives a home owner the opportunity to create investment income.Ms. Riley and Ms. Lynch have invested a portion of their mortgage proceeds.Ms. Lynch is expecting to earn about $1,000 per month in investment income.

But despite the financial reprieve, reverse mortgages have a cost can cause consternation and trepidation.Historically the interest rates charged on reverse mortgages are higher than conventional mortgages.Interest is added to the outstanding balance and is compounded semi-annually. Ten years ago, economist Sherry Cooper pointed out that the cost of borrowing was four percentage points above the Treasury bill rate at that time.

In the fall of 2009, when the Rileys started discussions about a reverse mortgage the rate offered was about 6.5 per cent, well above today’s rates. More recently CHIP is offering rates as low as 3.75 per cent.

And then there are the closing fees. One is advised to budget $175 to $400 for an appraisal; $300 to $600 for independent legal advice; and then about $1, 500 to CHIP for title search; registration, title insurance and other fees.

Another problem is the need for discipline with the funds advanced.Toronto- based Retirement Income Specialist Bruce Gilboord of Sun Life Financial urges all recipients of large sums of money to consult with a professional before launching into a spending spree.

And when one tinkers with an estate there’s always family debate.There were four children in the Riley family with no shortage of debate.

“We were all involved in discussions.We discussed it among ourselves. CHIP came as well. There were some discussions and it became a little lively at times.The most important thing was that my mother was happy and she was taken care of,” says Ms. Riley’s daughter.

Economist Sherry Cooper urges caution and patience when considering a reverse mortgage.

“They are not for people who intend to move soon or who want to leave the full value of their home to their heirs. It is probably advisable to wait as long as you can before getting a reverse mortgage, to maximize the value of your potential income and estate,” wrote economist Sherry Cooper in The Cooper Files.