ReportWire

Tag: reverse mortgage

  • Why a reverse mortgage should be a last resort for Canadian retirees – MoneySense

    Why a reverse mortgage should be a last resort for Canadian retirees – MoneySense

    “This leaves a total outstanding now of $204,939, with the interest owing being 25% of the balance owing after only five years,” says Ardrey. “As time goes on, this can overtake the entire value of the home. Thankfully, they do note that there is no negative equity, but there is not much left at the end of the day for the home owner or their heirs.” 

    Heath points to the fact that reverse mortgage rates tend to be much higher than traditional sources. “A borrower can expect to pay at least a couple percentage points more than mortgages and lines of credit. But if you read the fine print in your home equity line of credit agreement, the lender typically reserves the right to decrease your limit or even call the outstanding balance.”

    So, homeowners should not count on their HELOC being available when they need it.

    Right now, reverse mortgage variable rates are in the 9.5% range, while 5-year variable mortgage rates are about 6% and 5-year fixed mortgage rates are about 5%. HELOC rates are generally 1% above prime, so they’re currently around 7.95%. “There is definitely a premium paid to take advantage of reverse mortgages,” says Heath.  

    Ardrey raises another concern: how retirement living care can be paid for. “Often a home can be sold when a senior moves into retirement living, allowing them to pay for this care. In this example, the ability to use the home for this purpose would be significantly impaired.”

    He suggests that instead of using a reverse mortgage that could cripple the financial future, retirees need to look honestly at their situation and the lifestyle they can afford. “Though it may not be preferable to sell their home and live somewhere else, it may also be their financial reality. This speaks to the value of planning ahead to avoid being house-rich and cash-poor.”

    What are the alternatives to a reverse mortgage for Canadian retirees?

    Allan Small, senior investment advisor with IA Private Wealth Inc., says reverse mortgages “have not played a part in any of the retirement plans and retirement planning that I have done so far in my career. I think the reverse mortgage idea or concept, for whatever reason, has not caught on.” Also, “those individual investors I see usually have money to invest, or they have already invested. Most downsize their residence and take the equity out that way versus pulling money out of the property while still living in it.” 

    Finance professor and author Moshe Milevsky told me in an email, that when it comes to reverse mortgages—or any other financial strategy or product in the realm of decumulation—“I always ask this question before giving an opinion: Compared to what?” He worries about the associated interest-rate risk, which is “difficult to control, manage or even comprehend at advanced ages with cognitive decline.”  

    Jonathan Chevreau

    Source link

  • Planning for retirement with little or no savings to draw on – MoneySense

    Planning for retirement with little or no savings to draw on – MoneySense

    Retiring with little to no savings can be challenging, but it is not impossible.

    Canada Pension Plan (CPP)

    For a retiree who has worked most of their life, the Canada Pension Plan (CPP) will provide a modest retire income. The CPP retirement pension is meant to replace 25% of your historical career earnings, up to a certain limit. The CPP enhancement that started in 2019 will gradually increase that replacement rate to 33% over time.

    In 2024, the maximum CPP retirement pension payment at age 65 is $1,365 per month—that is up to $16,375 per year. However, most retirees do not make enough CPP contributions during their careers to receive the maximum. In fact, the average CPP pensioner was receiving only $758 per month in October 2023—about 58% of the maximum. A CPP Statement of Contributions can be obtained from Service Canada to help estimate your future CPP pension.

    CPP retirement pension payments can start as early as age 60 or as late as age 70, and the later you start your pension, the higher the benefit you will receive. There can be a lot of factors to consider related to timing your CPP pension, and payments are adjusted annually to account for increases in inflation and the cost of living.  

    sponsored

    National Bank: The Chequing Account for Newcomers to Canada

    go to site

    • Awarded Best Bank for Newcomers to Canada by MoneySense.
    • Open an account with no fixed monthly fee for up to 3 years.

    go to site

    Old Age Security (OAS) and the Guaranteed Income Supplement (GIS)

    Beyond CPP, retirees can also expect to receive an Old Age Security (OAS) pension. OAS is not based on work or contribution history, as it is a non-contributory pension. It is instead based on residency. A lifetime or long-time Canadian resident may receive up to $713 per month at age 65 as of the first quarter of 2024, which is $8,565 annualized. A 2022 change to OAS now means that pensioners aged 75 and over receive a 10% increase in their OAS pension. The maximum for a 75-year-old in the first quarter of 2024 is $785 per month, or up to $9,416 per year. This assumes they started their pension at age 65. OAS is adjusted quarterly based on inflation.

    OAS can begin as early as age 65 or as late as age 70. Delaying OAS can boost payments by 0.6% per month or 7.2% per year, so that you get more monthly, but for fewer years. 

    A low-income retiree with little to no retirement savings should consider starting OAS at 65, especially if they are no longer working. The ideal timing of a CPP retirement pension is a little more variable, but the main reason to consider applying for OAS at 65 is a related benefit called the Guaranteed Income Supplement (GIS). 

    GIS is a tax-free monthly benefit paid to OAS pensioners with low incomes. Single retirees whose incomes are below $21,624 excluding OAS may receive up to $1,065 per month, or $12,786 per year, as of the first quarter of 2024. The maximum income and benefit for couples varies depending upon whether both are receiving OAS. If both spouses are receiving the full OAS pension, their maximum combined income to qualify for GIS is $28,560 excluding OAS, and the maximum monthly benefit is $641 each ($7,696 annually). If your spouse is not receiving an OAS pension, the income limit rises to $51,840 excluding OAS, and a $1,065 monthly ($12,786 annual) maximum benefit applies.

    Jason Heath, CFP

    Source link

  • ‘Quit entertaining these crazy-butt ideas’: This South Carolina teacher earns $158K and is very close to retirement, paid-off home — but is considering more debt for renovations. Should she?

    ‘Quit entertaining these crazy-butt ideas’: This South Carolina teacher earns $158K and is very close to retirement, paid-off home — but is considering more debt for renovations. Should she?

    ‘Quit entertaining these crazy-butt ideas’: This South Carolina teacher earns $158K and is very close to retirement, paid-off home — but is considering more debt for renovations. Should she?

    Patience is a virtue: one that could come in handy in certain financial situations, according to personal finance guru Dave Ramsey.

    Dina, a 59-year-old teacher from Pawleys Island, S.C., is months away from retirement and a fully paid-off home but is considering more debt to finance some renovations. In a recent episode of The Ramsey Show, Dina said a home equity line of credit (HELOC) or reverse mortgage was on the table.

    Don’t miss

    Ramsey was stunned. “Quit entertaining these crazy-butt ideas,” he told her. He told Dina she could be jeopardizing her financial future if she isn’t willing to be patient.

    To borrow or not to borrow

    A lifetime of good choices and regularly seeking money advice put Dina’s family in a good financial position. She claimed her household income is $158,000, while she and her husband have no debt besides a small mortgage, don’t eat out much and drive old cars.

    The mortgage is worth $41,000. Dina said her savings over the next few months, combined with $28,000 in a tax-sheltered annuity, should be enough to pay the mortgage off fully by August 2024.

    Dina planned to complete one final school year and retire at the age of 60.

    However, the condition of their house is getting in the way of a fairytale ending. Their family home is roughly 24 years old and in need of some repairs.

    Dina said the siding needed to be replaced, and the family wanted to add a sunroom to the back of the house. She didn’t have estimates for how much these renovations would cost but is willing to consider a HELOC or reverse mortgage to finance them.

    Ramsey isn’t a fan of that idea. “Where is that woman who called and said she [regularly] listened to [my] show!?” he asked.

    Read more: Thanks to Jeff Bezos, you can now cash in on prime real estate — without the headache of being a landlord. Here’s how

    Like Dina, many seniors consider complex financial instruments to tap into the value of their homes.

    A reverse mortgage is a loan that allows seniors to convert some of their home equity into cash. The borrower doesn’t need to pay interest or principal while they live on the property, but the loan becomes due with accumulated interest when they move away permanently or pass away.

    There are about 480,000 reverse mortgages outstanding in the U.S., according to a 2023 report by the National Consumer Law Center (NCLC).

    Industry experts believe these instruments could see more adoption in the coming years as seniors tap into their enormous housing wealth. However, Ramsey called getting a reverse mortgage a “bad idea,” and the NCLC report said, “reverse mortgages end in foreclosure much more often than they should.”

    Instead of borrowing money, Ramsey recommended some patience.

    Delay retirement

    Dina could afford her renovations if she postponed her retirement and financed it herself, Ramsey said.

    Considering her household income and the fact that mortgage payments won’t be an additional burden after August, Ramsey estimated that Dina can pay for her renovations within a couple of years if she just worked a little longer. He also recommended getting a quote on the renovations so that she and her husband can create a detailed plan for the projects.

    “Work two more years, who cares?” Ramsey said. His co-host Jade Warshaw agreed: “If you can save to pay off the house, you can save to do these improvements; it’s just going to take a little time.”

    A little patience should save Dina’s retirement nest egg.

    What to read next

    This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

    Source link

  • Should retirees consider a home equity sharing agreement (HESA)? – MoneySense

    Should retirees consider a home equity sharing agreement (HESA)? – MoneySense


    Clay raised seed funding in 2023 and is initially launching the product to home owners in the Greater Toronto Area as an alternative to reverse mortgages and the simple—although not always ideal—option of selling a property to downsize or become renters.

    What is a home equity sharing agreement?

    The HESA is a relatively straightforward concept. You give some of your home equity to Clay in exchange for cash today. Clay will get paid when you sell your home in the future, up to 25 years down the road, meaning you don’t need to make monthly payments in the meantime.

    The limit for a HESA is up to 17.5% of your home’s value, up to $500,000. However, most home owners will get nowhere near that $500,000 limit. The average Canadian home price in December 2023 was $657,145, according to the Canadian Real Estate Association. That would translate to a potential lump sum cash payment of $115,000. The maximum payment of $500,000 would apply to homes valued at around $2.8 million.

    An interesting option with the HESA is that you can buy back Clay’s share of your home anytime after the first five years. So, it’s not an irreversible decision. But there are a few costs to consider.

    Before you can access a HESA, your property is independently appraised to determine its fair market value. Clay will then apply a risk adjustment rate of 5% to determine its starting value for the HESA. Home owners must cover a 5% origination fee and a closing fee of 1% of Clay’s share of your home appreciation (or $500, whichever is greater). The home owner must also pay the cost of inspections, appraisals and fees to cover the registration of Clay’s charge on the property.

    So, Clay gets a good deal on purchasing some of your home’s equity at a lower price, and you pay the ongoing maintenance costs for 100% of the property going forward. The origination and closing fees can also add up. These nuances help make the HESA a good investment for Clay.

    Should retirees consider a HESA?

    I give Clay credit for its innovative approach to helping seniors access their home equity in retirement. Retirees who can’t tap into their home’s value may not have sufficient income to cover their expenses. Some retirees want to use home equity for gifting to their children during their lives, sometimes to help them get into homes of their own.

    A simple alternative may be to downsize or to sell and become a renter. But downsizing can be costly when you consider the transaction costs, including real estate commissions and land transfer tax.



    Jason Heath, CFP

    Source link

  • How to use equity to buy a second home – MoneySense

    How to use equity to buy a second home – MoneySense

    “Potential buyers may not have the cash they require to pay for an asset like a second home in part or in full,” says Maxine Crawford, a mortgage broker with Premiere Mortgage Centre in Toronto. “They may have their money tied up in investments that they cannot or do not want to cash in. By using home equity, however, a buyer can leverage an existing asset in order to purchase in part or in full another significant asset, such as a cottage.”  

    What is home equity?

    Home equity is the difference between the current value of your home and the balance on your mortgage. It refers to the portion of your home’s value that you actually own. 

    You can calculate the equity you have in your home by subtracting what you still owe on your mortgage from the property’s current market value. For example, if your home has an appraised value of $800,000 and you have $300,000 remaining on your mortgage, you have $500,000 in home equity. If you’ve already paid off your mortgage in full, then your home equity is equal to the current market value of the home. 

    You’re 2 minutes away from getting the best mortgage rates in CanadaAnswer a few quick questions to get a personalized rate quote*You will be leaving MoneySense. Just close the tab to return.

    What is a home equity loan?

    A home equity loan (sometimes called a second mortgage) is when a home owner borrows money using the equity they’ve built up in their home as collateral for the new loan. Equity is the difference between the current market value of the property and the balance owing on the mortgage. Typically, home owners can borrow up to 80% of their property’s value, including any balance remaining on the first mortgage.

    How to use equity to buy a second home

    To buy a second property using home equity, you borrow money from a lender against the equity—meaning you use the equity as leverage or collateral. There are a variety of ways a home owner can do this.

    Mortgage refinance: When you refinance your mortgage, you replace your existing mortgage with a new one on different terms, either with your current lender or with a different one (when switching lenders, you may have to pay a prepayment fee, unless your mortgage was up for renewal). When refinancing, you can get a mortgage for up to 80% of your home’s value. Refinancing your mortgage allows you to access the capital needed to buy a second home.

    Home Equity Line of Credit (HELOC): A HELOC works like a traditional line of credit, except your home is used as collateral. You can access up to 65% of your home’s value. Interest rates on HELOCs tend to be higher than those on mortgages. However, you only withdraw money when you need it, and you only pay interest on the amount you withdraw, unlike with a second mortgage or reverse mortgage.

    Second mortgage: This is when you take out an additional loan on your property. Typically, you can access up to 80% of your home’s appraised value, minus the balance remaining on your first mortgage. Second mortgages can be harder to get, because if you default on your payments and your home is sold, the second mortgage provider only receives funds after the first mortgage lender has been repaid. To compensate for this added risk to the second lender, interest rates on second mortgages tend to be higher than for first mortgages.

    Reverse mortgage: Only available to home owners who are 55 or older, a reverse mortgage allows you to borrow up to 55% of your home’s equity, depending on your age and the property’s value. Interest rates may be higher than with a traditional mortgage, and the loan must be paid back if you move or die. You don’t need to make any regular payments on a reverse mortgage, but interest continues to accrue until the loan is repaid. 

    Sandra MacGregor

    Source link