Whether looking at home equity as a way to finance travel or to beef up your investment and/or retirement portfolios, reverse mortgages and home equity lines of credit can be risky.
While appearing to be very attractive options to many Canadians, a Financial Post report notes that reverse mortgages, for example, come with age restrictions, a cap on borrowed amounts and higher interest rates.
Current interest on a five-year fixed rate mortgage averages 2.99%, yet a Canadian
Home Income Plan reverse mortgage comes with an interest rate of 5.5 %.
Similarly, a home equity line of credit, or HELOC, allows homeowners to
access a portion of their home's value, but the Office of the
Superintendent of Financial Institutions (OSFI) has warned against
these products, noting that 'HELOCs are inherently riskier products, given their
revolving nature, persistence of debt balances and their ineligibility for
mortgage insurance.'
In comparison, a standard mortgage can be locked in at a fixed rate, but HELOCs typically carry variable rates which have historically risen, resulting in increased costs.
Other disadvantages to HELOCs can include:
Unless you're disciplined enough to pay down the principle, on top of the required interest payments, your home will sit in perpetuity until you pass away and the home is sold; The extra income provided is subject to taxes and might also result in government pension benefit adjustments.
Nevertheless, many financial experts agree that reverse mortgages and HELOCs can be used strategically to finance enjoyment in the first years of retirement, but they also warn against using that money as a tool for padding investment portfolios.
One portfolio manager notes that tapping into such products is, in fact, a very reasonable thing to do, but only provided that you've got enough cash flow and assets to cover repayment in the event that things go awry.
Another mortgage advisor sums it up by saying that there is nothing better than a mortgage-free retirement, noting that the risks outweigh the benefits because:
While generally advised that Canadians will require approximately 70% of their working income to live on in retirement, that calculation assumes that they are mortgage-free;
A home is the financial base for most, so taking out a mortgage upon retirement can put your entire estate plan at risk.
by David Pye
Similarly, a home equity line of credit, or HELOC, allows homeowners to
access a portion of their home's value, but the Office of the
Superintendent of Financial Institutions (OSFI) has warned against
these products, noting that 'HELOCs are inherently riskier products, given their
revolving nature, persistence of debt balances and their ineligibility for
mortgage insurance.'In comparison, a standard mortgage can be locked in at a fixed rate, but HELOCs typically carry variable rates which have historically risen, resulting in increased costs.
Other disadvantages to HELOCs can include:
Unless you're disciplined enough to pay down the principle, on top of the required interest payments, your home will sit in perpetuity until you pass away and the home is sold; The extra income provided is subject to taxes and might also result in government pension benefit adjustments.
Nevertheless, many financial experts agree that reverse mortgages and HELOCs can be used strategically to finance enjoyment in the first years of retirement, but they also warn against using that money as a tool for padding investment portfolios.
One portfolio manager notes that tapping into such products is, in fact, a very reasonable thing to do, but only provided that you've got enough cash flow and assets to cover repayment in the event that things go awry.
Another mortgage advisor sums it up by saying that there is nothing better than a mortgage-free retirement, noting that the risks outweigh the benefits because:
While generally advised that Canadians will require approximately 70% of their working income to live on in retirement, that calculation assumes that they are mortgage-free;
A home is the financial base for most, so taking out a mortgage upon retirement can put your entire estate plan at risk.
by David Pye
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