Recently we discovered an article published by The Globe and Mail, ‘Seniors taking out mortgages – is it ever a good idea? By Diane Jermyn. The article follows a senior couple who are considering accessing funds locked up in their home equity by taking out a conventional mortgage. The logic?
‘They own their house, having paid off any mortgages a decade ago, but they are considering taking out a low-interest, fixed-term, 30-year mortgage and investing the money in other ways, such as in the mutual funds that currently give them up to a 6-per-cent annual return.’
Does this make sense? Not when you consider that there may be a better, more affordable and reasonable option for a couple in their senior years.
Reference: Globe and Mail Article Link: https://tgam.ca/2gksnZE
As a Certified CHIP Reverse Mortgage Agent, I would review the CHIP option with the conventional mortgage option with these clients.
First off, I don’t see it as a good thing to be taking on a conventional mortgage in one’s mid-sixties or seventies. Notwithstanding the fact that lenders (even though an accusation of ‘ageism’ could be levied against them) will discriminate in some subtle ways; a charge that no doubt they will all deny! In any event, with a mortgage-free property, especially in a desirable neighbourhood, a CHIP Reverse Mortgage makes much more sense. Since up to 55% of the property’s appraised value can be realized (depending on age(s)) this would afford the homeowners a way of accessing the capital required for investments, travel, home improvements etc. without having to repay any of it until the ultimate sale of the property.
“they are considering taking out a low-interest, fixed-term, 30-year mortgage and investing the money in other ways, such as in the mutual funds that currently give them up to a 6-per-cent annual return.”
This makes no sense at all. Firstly, assuming a fixed-term mortgage of – say – five years, not only would they be committed to an ongoing monthly mortgage amount of anywhere from $1500 – $2500, depending on the amount of the mortgage, but if their circumstances changed (illness, death, etc.) there would be a penalty assessed in order to break the mortgage that could be of the order of $12,000 – $20,000. This latter alone could negate any profits accrued through their investments.
Also, the choice of a Financial Advisor is critical to this scenario. While there are a lot of good, honest, and competent advisors, there are also those whose only motive is to sell the highest commission-yielding financial products to trusting and often naive investors. This is especially true in terms of products such as Mutual Funds. What is critical here, in terms of the choice of funds, is to carefully scrutinize not only the historical returns (over at least a 10 year term) but also the ‘MERS’ or ‘Management Expense Ratios’. Some of these funds can carry an MER of 2.5 – 3.5% per annum, which will be deducted from the annual returns no matter if the investment is in the red or the black on an annual basis.
So if a conventional mortgage has been obtained, a homeowner, given the above scenario, could be put at financial risk at an age when recovery from any financial catastrophe could be difficult to impossible.
To discuss options for financing that work best for your situation, contact us at The Lynch Group Mortgages. We’re here to help you save money, now and far down the road.