Want to increase monthly income AND Net Worth in retirement?

The most frequent comment I hear from people regarding a Reverse Mortgage is that it is an "I hate my kids mortgage" People assume that home equity will be whittled away and nothing will be left as a legacy for their children. Let me dispel some of those rumors that are based on misinformation.

For homeowners age 55 or older who want to access the value in their home, the new Income Advantage plan from CHIP reverse mortgage offers a number of benefits:

Cash Flow Freedom. Clients may use the money any way they wish, and no payments (interest or principal) are required until the home is sold or both homeowners move out.

Ownership protection. Title remains in the homeowners’ names and they will never be asked to move or sell to repay their CHIP Home Income Plan.

Estate protection. The amount to be repaid is guaranteed not to exceed the fair market value of the home at the time it is sold, protecting the homeowners and their estate. In our experience, more than 99% of homeowners have equity remaining after repayment.

Tax benefits. CHIP Funds are tax-free and will not affect eligibility for government benefits such as Old Age Security.

Preserve assets. Using CHIP funds enables your clients to avoid RRIF withdrawals above the annual minimum or the sale of non-registered investments.

How does it work?

The new Income Advantage from HomEquity Bank, the originator of the CHIP Reverse Mortgage, allows homeowners to receive lump sum payments, monthly payments or a combination of both. The flexibility of this new program allows people to plan carefully, reduce overall interest and maximize the preservation of home equity. Qualification is as simple and straightforward as a traditional Reverse Mortgage, homeowners over 55 can access up to 40% of the equity in their homes but have total control over how they receive funds. Since interest only accumulates on the amounts withdrawn (like a HELOC), annual interest is minimized vs accrual and compounding on a larger lump sum. Clients also have the option to make a 10% prepayment towards principal and interest once a year, on the anniversary date of the mortgage.

Example: A retired couple has a $500,000 house with a $250,000 investment portfolio for an overall net worth of $750,000. They need additional funds to pay for home repairs and income to cover Home Care expenses, should they tap into their portfolio or leave it alone to grow and look for other solutions? They are not ready to downsize yet and do not want to rely on the help of their children who are working to save for their own retirement.

Solution: Income Advantage arranges to give the couple an initial lump sum of $10,000 to cover home repair costs and a monthly advance of $750. After ten years this is where they are at:

Money advanced over ten years is $100,000 plus interest for a total of $126,900.
Investment portfolio saw an overall return of 6% per annum and has grown to $447,711.92
Home has seen an average increase of 2% per year and has grown to $609,497.21

After ten years overall net worth has grown to $930,309.13

This is a general overview of what the Income Advantage can do and every situation is unique. In the end it is best to get qualified, professional advice and put together a plan that takes into account the whole picture.

THE SHOCKING IMPACT OF CONSUMER DEBT PAYMENTS AND HOW TO OVERCOME THIS SIGNIFICANT HOME OWNERSHIP BARRIER

 

Savings, market value and government guidelines are obvious obstacles but in my opinion, one topic that doesn’t get discussed in enough detail is consumer debt payments.

First a quick definition: Disposable income, is described as total personal income minus current income taxes. Essentially, your take-home-pay.

Here’s a “live” case study.

This consumer has $62,601 in non-mortgage debt or $0.86 for every dollar of disposable income. A model citizen by Canadian standards given StatCan’s most recent report reflected Canadians have $1.64 in debt for every dollar of disposable income.

The minimum payments currently required on this $62,000 debt is $1,878.03 per month. If this consumer chose to pay only the minimum payment requested on each monthly statement toward the repayment of this debt, it would take between 73 and 98 years to pay it all off. What will AMAZE you is by keeping unchanged the exact minimum payments required today, these debts could be totally paid in full between 39 and 50 months from now. Therefore, keeping the same payment every month from this point forward rather than paying the declining payment being requested on each statement is the key to paying the debt off faster. It’s remarkable to think you could pay it off this quickly given the average annual cost of borrowing of 16.794% which is actually even worse when annual credit card fees are added, making the effective annual cost of borrowing 21.054%. By the way, anybody getting this kind of return on your market investments at the moment? Hmmmm?

Now, watch this and take a deep breath. This same $1,878 per month would carry a mortgage principal of $410,513. Amazing buying capacity eh?…all tied up in a mere $62,600 in debt.

That’s right. If this consumer were debt free, it would be possible to save for a down payment with some simple strategies and a starter home (or condo more likely) is well within reach.

Now here’s a comparison for you.

Annual interest cost on this consumer’s debt is estimated at $8,975. Meanwhile the annual interest cost in the first year on a mortgage principal of $410,513 is $10,839. The difference is a mere $1,864 for the entire year. Wouldn’t you rather be a home owner paying interest on an appreciating asset?

Here’s my formula for eliminating the debt in this case study. My recommendations:

Stop using all cards, switch to cash only. Close all credit card accounts except two primary credit cards like a Visa or MasterCard. Write letters to all the other creditors requesting the accounts be closed and be sure to follow it up. Call the two credit card companies whose cards you are keeping and get them to give you their lowest rate available with no annual fee and no loyalty points. Nothing is for free! Use any savings remaining at the end of each month and apply it to the smallest debt owing until the debt is paid in full then use the freed up payment and apply it to the next smallest debt and so on.

There are a multitude of strategies that you can take here including paying highest interest debt off first, but I often find the former approach is usually more successful and you see the results faster. Every debt reduction plan should be designed specifically for the finances of the household and this is a good place to start.

The bottom line: don’t get distracted by the destructive effect of non-mortgage debt, get help to establish a plan with your mortgage broker and, as always…experience a strategy…not just a mortgage. We here at Dominion Lending Centres can help!

MARK ALLTREE

Dominion Lending Centres - Accredited Mortgage Professional
Mark is part of DLC Innovation Group based in Vancouver, BC.