Canadians have long known about the reverse mortgage. A commercial for the CHIP Home Income Plan has been a staple on screens across Canada for years. But taking money out of a home’s equity to reduce debt and provide cash in retirement has typically been considered a stop-gap measure for clients in desperate shape. A new product from HomEquity Bank hopes to reverse that attitude and make reverse mortgages a common tool advisors can use to be more tax-efficient and sustain or create more estate wealth.
Toronto-based HomEquity Bank originated the concept of reverse mortgages in Canada in 1986 and administers Canada's largest portfolio of reverse mortgages. The aforementioned Canadian Home Income Plan (CHIP) has been the main product of HomEquity Bank, the main underwriter of reverse mortgages in Canada.
“We’ve helped thousands of people stay in their homes in retirement,” says Jeff Spencer vice president of national sales for HomEquity Bank. “This has always been the goal of the company.”
But this past February the company began offering a new product, the HomEquity Bank Income Advantage plan, a new program that lets senior homeowners access equity in their home on a monthly basis, and at lower cost than CHIP.
Plan members will have two accounts: The first account is set up for monthly advances, carries a low interest rate of prime + 1.25%; the second account is set up for lump sum advances and carries a competitive 5-year rate. By delivering a lower-cost monthly cheque based on the equity in a principal residence the funds are extremely tax-efficient compared to drawing down registered retirement fund says Spencer. A $1,000 cheque from a home equity loan can be comparable to, say, a $1,300 drawn from registered retirement funds when tax implications are factored in. Over the entire length of a retirement these differences can add up with a combination of tax deferral and potential tax rate savings.
“What this plan allows an advisor to do is to take a client down a tax bracket or two and provide long-term tax savings,” says Spencer.
A recent presentation at the CFIP Conference saw Spencer present a case study of someone with a $2.8 million dollar net worth and 1.3 million dollar home. By taking some money out of the equity of the home monthly, withdrawals from registered retirement funds and non-registered portfolios were decreased. The family was able to add $600,000 in wealth to the estate. “After the presentation advisors were coming up and asking for the background on the case study,” says Spencer. “They could see this is more than just a reverse mortgage, this is about maximizing tax efficiency. This is about activating your real estate. Instead of leaving asset dormant, do something with that asset that can affect the overall wealth of the entire estate. It’s not complicated.”
By tapping the tax-efficient money in a home an advisor can help a client extend the life of an investment portfolio. Withdrawals from registered retirement funds can be avoided. The life of an investment portfolio can be extended, sometimes by five to ten years.
“If you can extend the lifespan of a portfolio by five or ten years an advisor can revisit the asset allocation of that portfolio. Maybe you can put in some more equity in to make some gains,” says Spencer. “Don’t think of real estate in a retirement plan as just a point in time where they are selling the house, but as helping to position a client a bit better, so they can stay in their home but also profit from it. It needs to be considered. You need to get all the assets of a client working for the estate.”
“All we’re saying is ‘use your home productively.’ How is this different than selling off a portion of your portfolio? It’s a different way to think about reverse mortgages,” says Spencer.
No wonder advisors are starting to take a look at the new product. The company doesn’t promote leverage in the case of reverse mortgages. The new program does not have the conveniences of a regular loan. There are no bank cards or cheques. An amount is deposited into the account of the member each month. That is, plan members cannot easily spend this money; there is a curbing of an impulse to overdo consumption based on these funds.
“If you want to change anything you certainly can but you have to contact our client service team and go through a process ,” says Spencer. “This is a good way to help an advisors keep their client on track with their long term plan.”
The product has only been on the market a few months but it seems many advisors are getting the message. At a time boomers are retiring in greater amounts anything to help fund a retirement has to be considered. Over the past 12 months alone HomEquity Bank has seen a 25% increase in volume directly from homeowners looking to unlock the value of their home.