REAL ESTATE

Reverse mortgage
has its drawbacks

ON THE surface, a reverse
mortgage looks like (oo
good a deal to pass up.

By Stuart Hartley
Contributing Writer

You get the mortgage
funds up front (with a large
piece of cash in your hand
if you want it): you get a
regular monthly income
(largely tax free); and you
make no repayments — all
while continuing to live in
your own home and build-
ing equity.

Pure paradise? Not quite.
As with most utopian deals,
there comes a day of
reckoning. And there lies
the rub,

First of all, in order to
qualify for a reverse mor-
tgage you must be at least
60, own your own home —
and have a substantial equi-
ty init.

So ideally your home
should be free and clear. Or
at most have only a tiny
mortgage balance outstand-
ing.

Of course, one sure way
of getting your equity out is
by selling your present home
and investing the money.
But where would you live?

Jeremy
Leevers

But ideal
for some
homeowners

A smaller place; a rented
apartment; a senior’s resi-
dence?) Perhaps not the
most attractive options.

With a reverse mortgage
you don’t have to move —
just stay put. And you don’t
have to pay back the mor-
tgage until you sell, no mat-
ter how Jong that might be.

How big a reverse mor-
igage can you expect to get?
That depends on how old
you are, the location and
condition of your home,
and current mortgage inter-
est rates.

For example, a 75-year-
old owner of a home worth
$300,000 would get about
$60,000, while a 65-year-old
owner of a similar home
would get about half that.

The reason a reverse mor-
tgage is so much smaller
than a regular mortgage is
that since you’re not making
any repayments the lender
builds an interest rate factor
— which is paid when you
sell. And this is where the
reverse mortgage loses some

of its appeal.

Suppose your. reverse
mortgage is $60,000, then
after five years you would
have to repay $115,000. In
10 years it becomes
$222,000; in 15S) years
$428,000 and in 20) years
$825,000.

Admittedly your equity is
also increasing, but even at
the average appreciation of
eight) per cent, today's
$250,000 home would be
worth $365,000 in five years
— much less than the $4 per
cent growth of the reverse
mortgage.

Like everything else,
reverse mortgages have pros
and cons. Apart from
allowing you to stay in your
own home, a reverse mor-
tgage gives you the benefit
of any increase in value.

You're also protected if
the property should drop in
value — you won't be
evicted.

A major drawback, how-
ever, is that you can’t leave
the house to an heir. It must
be sold. The fender always
wants his money back.

This article is by
Canada's chartered accoun-
tants. Stuart Hartley is with
BDO Ward Mallette.

Rosemary
Butcher

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