Reverse Mortgages

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Reverse Mortgages
2
Agenda

• What is a Reverse Mortgage?
• Who offers Reverse Mortgages?
• Who Qualifies?
• Types
• Reverse Mortgage vs Selling
• Reverse Mortgage Calculator

3
What is a Reverse Mortgage?

• A mechanism for a family to realize part of the
  equity on its fully-paid principal residence
  while continuing to live in it during retirement.
  
• Essentially the mortgager has a put option to
  make the issuer of the reverse mortgage take
  either the house or the value of the mortgage,
  whichever is less.
• The value of the put option rises with the length
  of time to expiration.

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Agenda

• What is a Reverse Mortgage?
• Who offers Reverse Mortgages?
• Who Qualifies?
• Types
• Reverse Mortgage vs Selling
• Reverse Mortgage Calculator

5
Who Offers Reverse Mortgages?

• Canadian Home Income Plan (CHIP)
• Aided By
• NATIONAL CHARTERED BANKS
• CREDIT UNIONS
• MORTGAGE BROKERS
• INVESTMENT AND FINANCIAL PLANNING FIRMS

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Agenda

• What is a Reverse Mortgage?
• Who offers Reverse Mortgages?
• Who Qualifies?
• Types
• Reverse Mortgage vs Selling
• Reverse Mortgage Calculator

7
Who Qualifies?

• Homeowner(s) aged 62 or older
• Own your home with your name(s) on title
• Home is principal residence
• Borrowing secured by home (including balance on
  any other mortgage or secured line of credit)
  does not exceed the amount available from the
  Reverse Mortgage

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Who Qualifies?

• Type of home meets CHIP criteria
• Home is located in area where CHIP Reverse
  Mortgage is available
• No minimum income required
• Medical conditions have no effect on eligibility

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Agenda

• What is a Reverse Mortgage?
• Who offers Reverse Mortgages?
• Who Qualifies?
• Types
• Reverse Mortgage vs Selling
• Reverse Mortgage Calculator

10
Types

• Term or Straight Reverse Mortgage
• Reverse Annuity Mortgage (RAM)
• Line of Credit Reverse Mortgage

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Term or Straight Reverse Mortgage

• Provides a lump sum of cash to the owner
• At the end of the term the principal and accrued
  interest are due
• Family can either pay off the mortgage or sell
  the house and pay the mortgage from the proceeds

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Term or Straight Reverse Mortgage

• The lender is limited to receiving the value of
  the house
• Appropriate for people who only need money for a
  short time
• Amount owing seems to grow quite quickly, because
  it is accumulating without repayments

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Example

• A home is worth 150,000. The owner gets a
  five-year term Reverse Mortgage and receives a
  lump sum payment of 50,000. Interest builds on
  that money for five years, at which time the
  entire amount must be paid back.

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Reverse Annuity Mortgage

• Provides a life annuity to the owner
• At death or when the house is sold, the mortgage
  must be settled.
• The estate or retiree receives the difference
  between the value of the house and the mortgage.

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Reverse Annuity Mortgage

• The lender cannot recover more than the value of
  the house.
• Best for people who want the security of a
  monthly income for the rest of their lives.

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Example

• A home is worth 200,000. The home owner takes
  out a Reverse Mortgage for 50,000. That 50,000
  used to buy an annuity which pays out 300 a
  month. In ten years time the house is sold and
  the 50,000 plus interest is paid back. The 300
  monthly income from the annuity continues for the
  rest of the life of the home owner.

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Line of Credit Reverse Mortgage

• Plan allows the borrower to take out only the
  amount of money he or she requires at any given
  time
• Maximum annual amount
• Interest is calculated on the total amount
  withdrawn
• Ideal for people who only want to withdraw money
  when they need it.

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Example

• A home is worth 100,000. The home owner takes
  out a Line of Credit Reverse Mortgage, and
  withdraws 3,000 in the first year to pay for
  home repairs. Interest is charged on the 3,000.
  The next year, 2,000 is taken out to fund a
  vacation. Interest is charged on the total amount
  withdrawn (5,000) and the interest accumulated
  on the 3,000.

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Agenda

• What is a Reverse Mortgage?
• Who offers Reverse Mortgages?
• Who Qualifies?
• Types
• Reverse Mortgage vs Selling
• Reverse Mortgage Calculator

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Reverse Mortgage vs Selling

• Inflation protection that owning a home brings is
  gone but so are the operating costs.
• The retiree will not face inflationary increases
  in rent, although some expenses will rise with
  inflation.
• Psychological benefits of owning a home
• Risk of value changes is partly shared with the
  mortgager, since the repayment is limited to the
  value of the home.

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Agenda

• What is a Reverse Mortgage?
• Who offers Reverse Mortgages?
• Who Qualifies?
• Types
• Reverse Mortgage vs Selling
• Reverse Mortgage Calculator

22
Reverse Mortgage Calculator

• Reverse Mortgage Calculator

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Final Thought/Questions

• A reverse mortgage does not seem to offer the
  pattern of retirement income that is useful ,
  except for some one who is very unlikely to want
  to occupy the house after the term expires.