How reverse mortgages can help high-net-worth clients

Used as part of a sound financial plan, bank believes strategy enables homeowners to sustain long-term investment plans

How reverse mortgages can help high-net-worth clients

Reverse mortgages don’t immediately resonate with financial advisors because they are perceived to be reserved for a marketplace rooted in “need”. HomeEquity Bank, however, believes that this perception is not only outdated, but that in fact the opposite is true – reverse mortgages can be a valuable tool for high-net-worth customers.

HomeEquity Bank, in partnership with Wealth Professional, is pleased to bring you an exclusive webinar: Guiding High-Net-Worth-Clients Through Family Crisis. HomeEquity Bank will delve into case studies and the challenges many 55+ homeowners face when trying to sustain long-term investment plans.

Andrew Cairns, National Lead, Wealth Management at HomeEquity Bank, will discuss this fast growing 55+ client segment, and how financial advisors have used the CHIP Reverse Mortgage to solve unique client situations with tax-efficient cash-flow solutions.

He told WP that many advisors are not familiar with reverse mortgages or the potential benefits to upscale clients.  Commonly, “reverse mortgages” and “high net worth” are often perceived an oxymoron, yet reverse mortgages have seen consistent double-digit growth in Canada. (1)

He said: “Surprising to many, a very fast-growing area of our own bank’s wealth focused reverse mortgage business is amongst the high-net-worth retirees.  Clients’ preference selecting reverse mortgages has nothing to do with financial need, but everything to do with finding tax-efficient cash flow alternatives and not paying the tax man too early.”

Cairns said that a reverse mortgage is very much like a conventional first-charge mortgage. However, he pointed out two important differences, “this mortgage does not have the obligation of monthly payments and concurrently allows clients to access their home equity without tax impact or otherwise selling off appreciating investment portfolios.” 

This combination of loan payment deferral and access to tax-free cash is of particular significance to advisors offering advance investment and insurance strategies.

Drawing from situations where the bank has partnered with advisors, Cairns told WP that many are discovering that financial plans made 15-20 years ago are obsolete as retired clients are living longer, with living expenses increasing beyond original estimates. Critically, most retirees don’t want to expose remaining investment portfolios to increasing risk to enhance returns to fill the gap. 

So, what is the solution? It’s estimated that 83% of Canadians 65+ own a primary residence. Much of this housing stock experiencing long-term appreciation of between 2-4% annually depending on location, offering significant untapped opportunity for those both with or without financial investments.

By taking out a conservative and reasonable amount of money from the equity gains built into their homes and substituting tax-free reverse mortgage cash flow for increasing day-to-day lifestyle expenses, clients could avoid excess withdrawals and withholding tax from RIFs for example.

Cairns said: “This allows the client to continue to live in their home, but also access and enjoy the gains built into their property at the time it’s most needed.”

He explained that if somebody owns a million-dollar house, and it goes up in value by 2%, that could perhaps be an unrealized $20,000 gain in the value of that person's house from year-to-year.  If $100,000 were needed for a luxury renovation for example, a tax-free reverse mortgage advance with a deferred interest cost of say less than 5% annually, could be reasonably substituted.  Given long-term increases in overall home equity over time, using a reverse mortgage could be a more palatable alternative to cashing out $142,000 pre-tax from a RIF to free up the equivalent cash needed. 

“Many parents have shifted their preference to see their adult children receive living gifts and there is a realization that children are going to inherit the family home regardless” Cairns said. “And if there's a desire for a parent to see and enjoy helping a child today, perhaps a reverse mortgage is the way to go without triggering the sale of appreciating assets.”

He added: “Reverse mortgages have proven to be a valuable solution when the sound financial planning principles are applied. Our job today is to get out there to financial planning community, show them the math and show them where these applications makes sense. Adding an additional arrow to the quiver of the financial advisor is our goal.

Don't miss this webinar from HomeEquity Bank. Click here to learn more about managing high net worth clients.

(1) BNN Bloomberg - Reverse Mortgages