Dear Money Lady Readers: I want to give you an alternative to a Reverse Mortgage Product.
I was overwhelmed with the response from readers about the previous column I wrote on reverse mortgages. There seem to be many Canadians considering this product as a way to inject the much-needed funds into their later years of retirement. Many of you had questions about other alternatives, so I wanted to provide you with one that I believe would be a better option: a collateral charge. The problem with a reverse mortgage is that you will often receive a portion of your home equity as a lump sum to do as you wish, with no need for repayment until you either sell your home or die. Many people view the lumpsum like a lottery win, and because they haven’t been good with money in the past, they often burn through it faster than they anticipated. Remember, with a reverse mortgage; there are no payments made to decrease the principal debtor at the very least; keep on top of the interest charges. So, the debt proliferates, especially with the help of a much higher interest rate than what is typical for a Canadian mortgage at your bank.
A collateral charge is a financial planning tool secured against your primary residence for 100% of its current value. It has no term or renewal and is fully open, extremely flexible, and for the right client – complete freedom. It gives you access to a lot more equity than a reverse mortgage, the rate is much lower, and everything is fully transparent – meaning you now see what you owe, what the monthly commitment is, and because of this, most people become very aware of their on-going financial situation.
I believe this product should be considered by all Canadians who own a home, whether working or in retirement. The reason is two-fold. If you have a mortgage, a line of credit, or consumer debt, placing it in a collateral charge structure will immediately fast track and pay off your debt faster because the interest is calculated differently than in any other loan format. It is a “true pay-for-what-you owe product,” calculating the interest on the outstanding balance each month.
The other reason to consider this product is that it has no term or renewal – so if you were to get it today, you could keep it for the next 20-30 years and never have to qualify again. Hence the reason we recommend it for estate planning. When you are retired, you are usually on a much lower income, and if you need access to money for any unforeseen event, you now have it. So, instead of signing over the partial title to get a reverse mortgage, you access your home equity through your collateral charge. Your collateral charge never changes, nor does it expire. You could keep it for many years with a zero balance, but you can quickly draw down the funds when you need them. When you retire, you still want to have access to credit if necessary, and you never want to be put in a compromising situation. When planning for the future, it is sometimes a good idea to set things up correctly to have options and freedoms that ensure your comfort, dignity, and security as you age.
Good Luck & Best Wishes,
ATML – Christine Ibbotson
Written by Christine Ibbotson, National Radio Host and Author of 3 finance books plus the Canadian Best-Selling Book “How to Retire Debt Free & Wealthy” www.askthemoneylady.ca or send a question to [email protected]