Financial advice: Say goodbye to family cottage before it's too late

 TORONTO -- After the unforgettable family gatherings, sunbathing on the dock and picture-perfect moments with the kids, it's hard to say goodbye to the cottage you've grown to love.
But financial advisers say that learning when to let go is a fundamental part of ensuring that your lakefront property doesn't become a bad investment.
"There's the romance of it, and there's the reality," said Jason Pereira, a senior financial consultant at Investment Planning Counsel in Toronto.
"The cottage is a place where you escape, but there's also its own series of responsibilities."
For cottage dwellers, that day is inevitable. Eventually you will face the dilemma of either selling the property or passing it down to your children, if you have them.
Neither option is easy and, in many cases, comes down to choosing the best time for the transition which, for tax purposes, will likely be after retirement when your annual income drops.
Financial advisers say one of the biggest mistakes cottage owners make is assuming that somebody else in the family actually loves the place as much as they do.
"A lot of people are quite preoccupied with keeping the property in the family, for some reason," said Christine Van Cauwenberghe, assistant vice president of tax and estate planning at Investors Group.
"People need to look at selling the cottage as a very viable solution."
Several advisers said they've seen instances where transitioning the ownership of the property created powerful rifts within the family. They suggest that cottage owners take a step back and ask themselves whether a few days at the beach should come at the expense of potentially destroying family relationships or shifting a financial burden onto their children's shoulders.
"Often you'll have two kids, and one will be financially successful and one will be not as financially successful," said Greg Rasmussen, an investment adviser at Manulife Financial in Muskoka, Ont., a popular cottage region.
"As soon as you transfer it into their name you're going to have that tax bill."
If one child can't afford the cottage, but the family insists on keeping it, then make special arrangements that are in writing. A promissory note can clearly outline the long-term financial expectations.
"Make sure that child is paying fair market value," Cauwenberghe said.
"Maybe it's not in cash, but in receiving that much less of the estate."
Even in a smooth transition of ownership, there's still years of potential fights ahead as siblings get saddled with the expenses of regular upkeep, taxes, and figuring out a way to share the property without bickering over whose family gets the place each weekend.
That's why advisers suggest that, unlike jewelry or silverware, a cottage shouldn't be treated like a family heirloom because it's not the kind of asset you can store in a drawer and forget about.
"A lot of people can't afford -- even on a divided basis -- to run them," said Tony Layton, chief executive of financial services company PWL Capital.
He said he's seen instances where children will gain possession of a cottage, but don't have time to maintain the property and let it fall into "semi-ruin."
Eventually those children can be forced to sell the cottage and -- depending on how much the value has appreciated over the years -- can be hit with a massive tax bill they can't afford.
In other instances, one child might want to sell the property while other others do not, which can lead to further problems if those situations aren't laid out in writing.
"If anything, you should have agreements in place that say: 'You can buy me out or I can force the sale,"' said Pereira.
"There almost has to be a prenup in place for the cottage to avoid those hazards down the road."
Cash proceeds are easier to divide amongst a group because its a relatively clear-cut process that involves more numbers and less emotion.

by David Friend, The Canadian Press

Reverse Mortgages – A mortgage option for Retirees

 What exactly is a Reverse Mortgage?

A Reverse Mortgage is a loan available only to homeowners 55 or older. The amount you can borrow is based upon several factors including your age and the value of your home.

What's the difference between a Reverse Mortgage and a traditional loan?

There are two main differences. First, unlike a traditional loan, you can get a Reverse Mortgage regardless of your income or credit rating.

Second, you are not required to make any payments on a Reverse Mortgage until you choose to move or sell your home. (However, you can make payments on the loan if you choose to do so. You’ll even get a discount on the interest rate if you do.)

When you do decide to move or sell, the loan is repaid from the proceeds of the sale of the home. After the loan is repaid, all remaining money belongs to you and your estate.

How much equity (money) will be left in my home after I repay the loan?

On average, homeowners have well over 50% of the value of their home left to enjoy after repaying the loan. This money belongs to you. The exact amount will depend upon several factors, including: the amount of your loan, the value of your home, and the amount of time passed since you took out the loan.

Repost by Steven Porter, REMAX Aboutowne Realty Corp.

Should cash-strapped retired homeowners eye HELOCs or reverse mortgages?

 You’re a senior citizen and you don’t have enough income to live comfortably. What do you do?

It’s an all-too-common question, especially with more than half of Canadians carrying debt into retirement. If you own a home with sufficient equity, and you want to keep living in it, two increasingly popular options are a home equity line of credit (HELOC) and a reverse mortgage.

Although both give retirees access to cash, there are significant differences between the two: reverse mortgages are straightforward while HELOCs in retirement are not.
If you borrow modestly and with discipline, however, a HELOC can be the best way to bail you out of a retirement cash jam.

The Home Equity Line of Credit (HELOC)
HELOCs are revolving credit lines offered by banks,brokers and other lenders that let seniors borrow against their homes in small or large increments. They typically require only monthly interest payments, no principal. So if you took out $100,000, you’d pay $292 a month in interest, using current rates of 3.50 per cent.

HELOCs, unlike reverse mortgages, do not require monthly principle payments. However, you can make lump-sum payments whenever you want.

The Reverse Mortgage
HomEquity Bank’s “Canadian Home Income Plan” (CHIP) is Canada’s only widely available reverse mortgage. The bank lends anywhere from 20 to 50 per cent of a home’s value, depending on the applicant’s age, location, existing secured financing and property type.

Last month, HomEquity Bank rolled the “Income Advantage,” which has notable improvements over the traditional reverse mortgage: Most importantly, the rate is lower. If you make pre-set withdraws each month, you’ll pay just prime rate + 1.25 per cent (4.25 per cent today). That compares to rates of prime + 6.00 per cent in 2009.

Other improvements include lower fees, the ability to take smaller monthly advances instead of big lump sums (which rack up unnecessary interest), the option of locking in variable-rate borrowing, and no rate surcharges on existing customers who renew.

Which is better?
To get a HELOC you have to qualify. The lender will check your credit, verify your income and analyze your debt obligations.

With a reverse mortgage, if you’re 55 or over with sufficient equity and a marketable house, you generally qualify. And you never have to make a single payment, even if you live in your home past 100.

Where HELOCs have appeal is with interest savings and flexibility. They’re roughly ¾ of a percentage point cheaper than the Income Advantage plan, based on current rates. That’s over $3,500 of interest savings over five years on $100,000.

But HELOCs aren’t without risk. The death of a spouse, new lending regulations, changes in a bank’s credit policies or increases in capital costs could all cause a bank to restrict a senior’s HELOC borrowing. Additionally, rising interest rates or excess borrowing could potentially hike monthly payments, making them unaffordable for a cash-strapped retiree.

Another consideration is that seniors needing additional cash flow may use the HELOC itself to make the interest payments. The concern there is the bank getting worried when it sees steadily rising debt with no principal payments.

But Louis-François Poirier, National Bank’s mortgage product manager, says this alone is generally not enough for his bank to restrict a senior’s HELOC, as long as the customer is paying as agreed. “We encourage the customer to make principal payments, but our credit agreement clearly states that the only amount expected monthly is the interest.”

One Possible Strategy
For some retirees, the interest savings of a HELOC is worth the tradeoffs versus a reverse mortgage.
If times get tough and the senior can no longer afford the HELOC payments, or runs out of borrowing room, they can usually refinance the HELOC into a reverse mortgage.

But this requires caution. You never want to borrow more from your HELOC than what HomEquity will lend you. “I would want to ensure that if I was taking that risk, that the client was borrowing no more than 80 per cent of what they would qualify for at the time with us,” says Jeff Spencer, vice-president of national sales at HomEquity Bank.

If you do use a HELOC to supplement retirement income, it’s vital to have an experienced independent financial or mortgage adviser do the math to set an appropriate HELOC limit – one that factors in your age, possible interest rate increases, potential property value declines, and so on.
Retirees should also be mindful of interest rate risk. “Personally, I think it’s a good analysis to test one’s monthly budget with a 200 or even a 300 basis point increase to their contractual (interest) rate,” says Mr. Poirier. A three-percentage point hike would inflate a $292 monthly interest payment (on a $100,000 HELOC) to $542.

Yet another thing to remember is that unforeseen factors can reduce your future ability to refinance. Those risks include a fall in your property value, reductions in maximum lending limits and increases in life expectancy. The Income Advantage eliminates those worries and, to some, that’s worth the 0.75 percentage point rate premium over a HELOC.

“For most retirees that have a retirement plan running out to the age of 90, I don’t think the annual saving of interest is worth the extra risk that their property declines significantly, or loan-to-value calculations change at our firm, or they don’t stay disciplined and use more of the [HELOC] than intended,” HomEquity Bank’s Mr. Spencer adds.

Borrowing your way through retirement
Mr. Poirier says a small but growing percentage of seniors are supplementing retirement cash flow with a HELOC. The same holds true for reverse mortgages.

But while it’s possible to use a HELOC as a “security cushion or emergency fund,” he is first to admit that “for seniors, day-to-day expenses should ideally be covered by retirement savings, as opposed to borrowing.”

Unfortunately, that won’t be a reality for up to one-third of Canadians who rely on their home equity to survive retirement. For many of those folks, the HELOC vs. reverse mortgage debate is one they’re sure to encounter.

By Robert McLister