Canada’s most recognizable name in the reverse mortgage business is ramping up business, offering a number of flexible options, including optional interest repayment, to increase its appeal as an investment tool for financial advisors.
Canadian Home Income Plan Corporation officials say between 50% and 75% of its clients are already using at least a portion of their reverse mortgage proceeds to invest, so appealing to advisors seems a natural step.
While some advisors loathe seeing clients take on debt in their retirement years, Arthur Krzycki, director of marketing for CHIP, says clients referred to CHIP often need to boost their income but have little to no investable assets.
“You can go from no portfolio to having a portfolio that’s worth $150,000 to $200,000,” he says. “The client can invest that in a variety of instruments, or even a GIC that allows you to deduct the interest expense off CHIP, and all of a sudden you have a nice tax advantage income stream that you can offer to your clients.”
Krzycki says CHIP has successfully marketed itself to this specific, albeit large, demographic of house-rich seniors with limited income. Many seniors have the option of selling their home, and then living off the proceeds. For those 60 or older who wish to remain in their home but have not saved enough to generate the income they want, a reverse mortgage may be one of the few options available.
Banks also offer traditional lines of credit that can be leveraged using the equity in a home, but these are available only to those who can afford the interest payments. With a reverse mortgage, as long as the occupant of the leveraged home resides in it, he or she is not required to pay back any of the principal or interest on the mortgage. In most cases, the loan must be repaid only if the owner moves out of the home or passes away.
The client’s ability to access that much capital without facing interest payments could be a key selling feature for advisors because it allows clients to transfer the value of their home into a portfolio the advisor can manage.
CHIP says it’s trying to encourage this by offering a range of new features that can be tailored to the specific financial planning needs of an advisor’s client. Offerings include flexible mortgage rates at prime plus two percentage points and an interest discount of one percentage point for clients who pay their full annual interest.
The interest-discount program may seem unnecessary since the appeal of CHIP’s plan is the no-interest payments, but repaying interest on the mortgage creates a tax deduction for the client as well.
“What we’re trying to do, particularly with financial planners, is to give them as much flexibility as possible,” Krzycki says. “For example, if you are 60 or 65, and you still have income coming in, you may be quite comfortable paying some of that interest off.”
But even proponents of reverse mortgages, like Vancouver-based advisor Jack Buckingham, view them as a last resort for a specific client profile.
“The only time I use the CHIP program is when somebody doesn’t have any cash,” he says.
Buckingham, a director with Dundee Wealth Management’s Private Client Group, says he’s used reverse mortgages about a dozen times over a 20-year period to help senior clients build a steady stream of income through conservative investing. One of those clients was his own mother.
“She’s got a half-million-dollar property, and I took out a $200,000 CHIP program, invested that money, and she takes $1,000 a month out of that money, supplementing her income. It’s tax- free to her because all she’s doing is spending the house that she lives in,” he says. “On this money that she’s borrowed, she’s taking it out at $1,000 a month and it’s been earning 8% to 10%. She’s been taking $12,000 a year from $200,000, but she’s still got over $200,000 in her investment account.”
Buckingham says in his mother’s case, it works, but he often sees the tactic being abused by either advisors who see a new way to add assets to their books or by seniors who spend the money without a plan. He stresses that the reverse mortgage should be invested conservatively so it can fill the void in a senior’s income needs.
“Some advisors will take that money and invest aggressively, and if the market declines, it starts to get really ugly. I’ve seen some lousy investment advice by some advisors,” he says. “You take $100,000 of somebody’s money, invest it aggressively, and it could be down 20% in 12 months.
“If somebody says ‘I only need $500 more a month to keep me in the lifestyle I’m accustomed to,’ then that’s what you do. It’s not to be used so I can get you $400,000 on your million-dollar house. A lot of people in their 70s and 80s don’t need that kind of money.”
Buckingham also notes the client’s heirs are on the hook for the reverse mortgage, which will be deducted from the estate before anyone else is paid. While this is of little material consequence to the holder of the mortgage, for most senior clients, it’s extremely important they leave something for their children. He adds that all of the stakeholders should be consulted on the decision.
Before implementing his mother’s reverse mortgage strategy, he told his six brothers and sisters what was being done and that there was a chance it would reduce their inheritance. They all supported the decision.
“We told her, we don’t care; spend your house and be happy,” he says. “Everybody wins, except for the beneficiaries. If it’s invested properly, nobody loses.”