Long look needed at short-term solution
Wendy McLellan
Province
Together with his wife, Patricia, former retirement planner Konni Bernaschek is a member of the Canadian Association for the Fifty Plus. Photograph by : Nick Procaylo, The Province
The ads are seductive: Unlock the equity in your home. Access tax-free cash to supplement your income. Stay in your own home and don’t make payments until you move.
Reverse mortgages offer everything the TV ads promise, but advocates and financial planners worry seniors don’t have enough information about what they’re getting into when they sign the loan papers.
In Canada, reverse mortgages have been available to seniors for 20 years and the business is growing as steadily as the aging population and property values.
A reverse mortgage advances up to 40 per cent of a home’s value and requires no monthly payments. The interest, which is calculated semi-annually, is added to the mortgage balance every year.
Instead of paying down the mortgage, homeowners can allow the balance to increase every year as the interest compounds. The mortgage continues to grow until the homeowner, or the estate, sells the property, at which time the loan is paid off.
In Canada, only one national company, Canadian Home Income Plan, or CHIP, sells reverse mortgages. CHIP, a wholly owned subsidiary of the publicly traded Home Equity Income Trust, sells the loans directly as well as through mortgage brokers and by referral from financial institutions. The current interest rate for a three-year term is 8.6 per cent.
According to CHIP’s financial statements, the reverse-mortgage business is growing by about 10 per cent a year in Canada. At the end of 2004, the company reported $472.3 million in outstanding mortgages, an increase of almost $37 million from the beginning of the year.
At the end of September last year, the company said it held $520 million in mortgages, about 25 per cent registered against B.C. homes. The company advances 250 to 300 mortgages a year in B.C.
It’s the compounding interest on reverse loans that worries advocates and financial planners.
“Reverse mortgages are just a short-term solution and I’ve yet to see one that made sense,” said Scott Hannah, executive director of the non-profit Credit Counselling Society.
“The interest keeps compounding, and if you live 20 more years, you get to stay in your house, but you can’t leave because you could be walking away with nothing.”
He said seniors who are accumulating debt might see reverse mortgages as the perfect solution but, before signing up for a loan, they should get a firm grip on expenses and discuss their options with family and a financial advisor.
“People don’t look at all the implications, and they don’t think long-term.”
Cathie Hurlburt, a registered financial planner with the Vancouver-based Integrated Planning Group, said some of her clients signed up for a reverse mortgage because they wanted to stay in the family home but couldn’t afford the upkeep on their income.
But, after five years of watching the mortgage increase, the couple asked Hurlburt for help.
“The mortgage allowed them to stay in the house, but in the end, he was 80 years old and so distraught about how much he owed it was driving him out of his mind,” she said.
“And they were still spending a lot of money on the house. They didn’t understand that having no debt payment wouldn’t solve the problem — they were living a fantasy.”
Hurlburt advised them to sell the home, downsize their living arrangements and put their remaining home equity into investments.
With a little more financial planning, she said, the couple is far happier, even though they had to move.
Konni Bernaschek, a local member of the Canadian Association for the Fifty Plus (CARP) and a former retirement planning counsellor, said reverse mortgages are useful for a select few.
“I believe reverse mortgages are a form of assistance that is a last resort for someone who has no other financial means and wants to stay in their home until the very end,” said the Coquitlam resident. “In this regard, they are useful. But people need total, full disclosure to know what they are getting into.
“With our aging population, there will be a much larger group on fixed incomes, and reverse mortgages could experience exponential growth. We need to be sure the product is well evaluated and regulated.”
A report released this month by the Vancouver-based Canadian Centre for Elder Law Studies recommends the province develop regulations specifically for reverse mortgages, with improved disclosure statements and a 10-day cooling-off period so people have more time to consider their decision.
“We have a number of concerns,” said Kevin Zakreski, a staff lawyer for the law studies centre. “This is not a type of loan people are familiar with — it’s not like a traditional mortgage, it’s a rising-debt loan.”
The centre suggests B.C. follow Manitoba’s lead and develop specific legislation for reverse mortgages.
But CHIP president and CEO Steven Ranson said borrowers receive disclosure statements and the company requires everyone to get independent legal advice before the money is advanced.
CHIP is regulated under B.C.’s Mortgage Brokers Act, which includes a 48-hour cooling-off period for borrowers. The legislation also requires a disclosure statement, but advocates say the document is geared to traditional mortgages and doesn’t clearly explain the rising debt aspect of reverse mortgages.
Ranson said setting up a reverse mortgage takes an average of 30 days, so a longer cooling-off period is not needed.
“We are completely in favour of disclosure and more disclosure, but we don’t see the need for more legislation,” Ranson said. “This is really unnecessary.
“To us, there is already regulation of reverse mortgages in B.C.”
© The Vancouver Province 2006
