Reverse Mortgages Are for Seniors, Not Retirement Planners
February 23, 2012 · Print This Article
In an article published on the Advisor website in early February, the author discusses David Chilton’s attitude on reverse mortgages. Through his “Wealthy Barber” book series, Chilton has offered retirement advice to thousands of Canadians. However, the article veers off course a little by calling him a “detractor” of reverse mortgages. The audience that he spoke to was comprised of people who wanted to know about where to start their retirement savings, and for that audience, of course reverse mortgages are not the solution.
Chilton Devotes a Chapter to Reverse Mortgages in Book
In his sequel to “The Wealthy Barber”, “The Wealthy Barber Returns”, Chilton spends a chapter on the topic of reverse mortgages. He does recommend avoiding them, but again, consider his audience. They are adults looking at saving for their retirement, in which case his strategy is sound. If you have the freedom to invest proactively for your retirement, planning for a reverse mortgage to fund investments or anything else is not something you want or plan to do.
The clientele for a reverse mortgage are generally seniors already in retirement who want to free up capital for expenses such as travel, family events such as weddings or helping out a child with a new house, or to pay off higher-interest debt and wipe out monthly payments, not adults of pre-retirement age. Inflation and unforeseen expenses may have caused their retirement plans to go somewhat off course, and a reverse mortgage can help them get back on track.
He also states in his book to “not rule them out”, which is hardly something a detractor would say, and allows for the possibility that those in retirement may require a reverse mortgage.
Reverse Mortgages Are Financial Instruments
Surprisingly, a number of clients of Horizon Equity are not even seniors who really “need” any money, but seniors who find themselves in high-value homes worth over $1 Million. Reverse mortgages are a tax-free way to access home equity, which makes them an attractive financial instrument to well-heeled seniors who are trying to reduce tax costs on their retirement nest egg. They are a financial instrument like any other and when used correctly, can reap huge benefits.
Home Equity Line of Credit Advice is Incorrect
Where we do take issue with what Chilton writes about reverse mortgages is when he recommends a home equity line of credit (HELOC) over a reverse mortgage. First of all, interest rates on lines of credit, even secured ones, are skyrocketing at Canada’s banks. Many A and A+ credit rating customers who have been with banks for years are seeing interest rate increases as high as 3.5% above prime on lines of credit. A bank can raise the interest rate on your line of credit for no reason at any time, leaving you caught out with high monthly payments should they decide to do so. There are no monthly payments on a reverse mortgage, just one interest payment when you sell your home.
His comparison of reverse mortgage interest rates to compound interest rates is simplistic as the equation doesn’t take home price appreciation into account. The CHIP Home Income Plan bases actuarial formulas on the guarantee in place that you will never owe more than the current value of your home at the time that you sign the loan papers, not the future value. 4% a year is a conservative industry-accepted rate for home appreciation.
On a $300,000 home, you add $12,000 to the value of home in one year, and that compounds further over the term of the loan with no deterioration in the equity. Essentially, the compounded appreciation on the house pays for the interest on the CHIP Home Income Plan, for many years or indefinitely if the Real Estate Market appreciates at an average rate. Unless you are living in an overpriced area, which most Canadian seniors do not, a reverse mortgage makes sold financial sense.
Chilton’s advice is completely sound to middle-age and young adults who are trying to save for retirement. You don’t want to plan for a reverse mortgage; you want to plan to have a comfortable retirement. Life has a way of derailing some of the best-laid retirement plans and a reverse mortgage is a highly regulated financial instrument that you can draw on if you need to. Contact Horizon Equity today to find out more.