How to turn a second home dream into a reality
This article was provided by Equitable Bank.
A reverse mortgage is often assumed to be a reactive option for a senior homeowner in financial need, but it’s not always the case. In fact, there are situations when a reverse mortgage can be used proactively to unlock financial opportunities.
Meet Sheila and Dan
Consider the case of Sheila and Dan, a married couple who both recently turned 70. They live in the Kitsilano neighbourhood of Vancouver in a three-bedroom house that they purchased in the 1980s when their two kids were young. Their house is probably worth around $2.5 million and is mortgage-free.
Despite being multi-millionaires on paper, their other assets are fairly modest. They have $200,000 combined in RRSPs, a small savings account, and are both collecting their CPP and OAS government pensions. They each receive close to the maximum CPP retirement pension, as well as the maximum Old Age Security, which amount to only about $3,500 per month.
They helped their children with down payments on homes in the BC interior, which has significantly depleted their savings. Sheila and Dan’s retirement plan included moving out of Vancouver and cashing in on their home equity. However, they are not quite ready to make the move yet, in large part because Dan’s 95-year-old mother is in a nursing home in nearby Burnaby. As a result, they may stay in their home for the next few years to be close to and care for her.
Sheila and Dan are now grandparents to four grandkids and would love to spend more time with them. However, the drive from their home to visit their children is at least 5 hours one way. Their kids both have modest detached homes that are great for their young families, but neither is well-suited for Sheila and Dan to spend a night, let alone an extended visit.
Their son lives in Cranbrook and their daughter lives in Kelowna. The city of Nelson is in the middle and Sheila often comments how great it would be to have a house there that could accommodate everyone. They could drive there once or twice a month and be able to stay for a few days at a time, as well as host their kids and grandkids for holidays. Over the summer, if the kids were not in camps, they could stay with them for visits as well. In the meantime, their Vancouver-area home would be their home base, so they can continue to be close Dan’s ailing mother.
They have done some online research and found 4-bedroom homes for well under $1 million, although many would need renovations. Dan is certain they would not qualify for a mortgage and will not even entertain the conversation. He figures it will have to wait a few more years, but in the meantime, they are missing out on time with their young grandkids. They worry as they get older, they may not want to hang out with their grandparents like they do now.
Dan dreams of getting a small condo in Arizona, where he and Sheila can spend time over the winter and play golf together. He has looked at places online that are selling for around $200,000 US dollars. He feels guilty sharing this dream with Sheila, which would take them even further away from their kids and grandkids for part of the year. Besides, even if they cashed in their RRSPs, they would have well under $200,000 Canadian, so would fall short of what they would need to buy in Arizona.
The reverse mortgage solution
A reverse mortgage for Sheila and Dan may help them balance all of their priorities. It was suggested by a neighbour, and after a bit of research, they got excited about the possibilities.
They can probably borrow up to $875,000 of their $2.5 million Kitsilano home and would not have to make any monthly payments. This would allow them to buy a home in Nelson near their kids. Depending on the purchase price and potential renovations, they may even have enough to buy a condo in Arizona as well.
The challenge for Sheila and Dan might be the increased carrying costs of owning three homes. Besides that, Dan realizes they can probably only go to Arizona for short stints, given their caregiver duties for his mother. They would spend much less renting a couple times a year, compared to the cost of owning in Arizona, unless they rented out the property when they were not using it. They do not want the hassle of being landlords anyway.
They agree their best option might be to buy a house in the BC interior to be closer to their kids and grandkids. Maybe some of the potential renovations could wait until they sell their primary residence, have the cash to do the work, and are there full-time.
Sheila and Dan’s reverse mortgage will accumulate interest for a few years until they sell their home in Kitsilano, but it’s a small price to pay to be able to juggle their priorities. In the meantime, they can slowly draw down on their RRSPs to cover the added monthly costs of owning the second home, while keeping their incomes in a relatively low tax bracket.
A reverse mortgage may be the ideal short-term tool for Sheila and Dan, who are millionaires, but cannot access their wealth without selling their home. Although hard to think about, Dan knows his mother is in her final years, so their remaining time in Vancouver is temporary. When they sell their house and move permanently to Nelson, they would pay off the reverse mortgage and any prepayment charge (dependent on when they sell), and by then will have plenty of savings to supplement their spending in their 70s and 80s—including spoiling their grandkids and improving their golf game in Arizona.
Here is an Interesting article explaining how to use a REVERSE MORTGAGE to protect your current savings/investment potfolios.
For more information call Neil McJannet 250-861-8757.
In order to be approved for a reverse mortgage, there is specific criteria REQUIRED. that the underwriting team reviews. Outlined below are several key areas to be considered by the lender before making any approval.
Do you meet the minimum requirements?
- Homeowners must both be 55 or older, own the home, and live in a province.
- The appraised home value must be at least $150,000.
- Secured debt is less than what the amount a client is approved for.
What is the property type?
- HomeEquity Bank will provide a reverse mortgage on most home types (detached, semi-detached, townhomes, condos, mobile homes).
- Exceptions include: the three territories (Nunavut, Northwest Territories, and Yukon), or on native reserves.
How will the funds be used?
Did you know that reverse mortgage funds can be used in many ways? Such as:
- Travel, medical expenses, and an early inheritance to children.
- More commonly, many homeowners use the funds to purchase property.
How much can they be approved for?
The age of the clients is one of the major determining factors when calculating the percentage. In general, the older your clients are, the more they can get approved for.
Protecting the remaining equity in your home is important to HomeEquity Bank and by utilizing conservative lending rules clients generally get to retain more of the equity in their home. To get a tailored view of how much your clients can get, use our online calculator at chipadvisor.ca/calculator.
Features of a CHIP Reverse Mortgage
- Homeowners age 55 and older
- No payments are ever required
- No Income qualifications
- No Credit requirements
- Qualify for up to 50% of the value of the home
- Money can be received as a lump sum, or over time or combination
- Owner maintains title
- They can sell or move at anytime
- Receive the money tax free
If you have any questions or would just like to discuss the Reverse Mortgage feel free to call me at 250-861-8758.
This product is very mis-understood by a lot of people so for unbiased information it is best to talk to a Proferssional.
Check back periodically for tips and advise:
1. Approvals, Credit and Income....What do we look at?
* Our approvals are based primarily on age, number of applicants, and then property type/location/value.
* Maximum approval is 55% of the value of the home, but eligible amount varies based on the above. In general, the older the client, the more they are approved for. The younger the client, the less they are approved for. Also, detached homes receive more than strata properties