When CSV loans and reverse mortgages are the answer

Equitable Bank VP explains the challenges facing Canada’s ageing retirees

When CSV loans and reverse mortgages are the answer

The industry needs to up its game over raising awareness of Cash Surrender Value loans and reverse mortgages as retirees live longer and require different financial solutions.

That’s the view of Mahima Poddar, VP of Product and Corporate Development at Equitable Bank, who said solutions are needed now fewer Canadians are entering retirement with employer-related benefits.

She also highlighted leveraging real estate and life insurance policies as other ways of planning the decumulation stage and warned that about 80% of those that don’t have an employer pension plan are likely to be in a more difficult financial situation because of insufficient savings.

She told WP: “You have this idea of house-rich, cash-poor home owners increasing in concentration in major urban markets in Canada.

“The other piece we found was that in order to set up the beneficiaries - their children, usually, or their spouses – older Canadians have done a good job of setting up life insurance policies.

“So we see the home and, if you have participating life insurance policies, as assets that can help carry you into longer life expectancy with less income in retirement.”

Canada’s life expectancy is projected to rise to 81.9 for males and 86 for females by 2031 and the need to fund retirement while living alone as a senior is now also a crucial part of financial planning for seniors.

Two solutions that Poddar believes will become more popular as awareness builds are CSV loans and reverse mortgages. 

The former line of credit is a way to access capital a client has built up over their life through participating in a life insurance policy and, crucially, doesn’t require any type of principle or interest payment on the loan. Reverse mortgages are seen as more of a long-term lending product so if you end up selling your home and you’re not at the end of the term of your mortgage, there is a prepayment penalty. If the client dies there is no penalty, while if you move to long-term care it’s cut 50%.

Poddar said: “Both are not well understood by the market and they are fantastic opportunities, especially from a tax-planning perspective, which is one of the complex elements of decumulation. Both of these strategies make a lot of sense.

“Life insurance is a bit of a hidden treasure in Canada because there is no tax implication on the proceeds of a life insurance policy as long as you don’t collapse it while you’re still living. We’ve been in the market with reverse mortgages for the last year and what we’ve seen is that more and more retired Canadians are leveraging up to help their children with a home purchase.

“It’s not even that they don’t have enough to carry them through retirement – they are trying to do their best to support their children with a down-payment or a house purchase as well.

“In both scenarios the reverse mortgage or the CSV line of credit are good ways to support that desire because it doesn’t put a strain on the senior’s lifestyle going forward.”

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