MODULE 13: UNIT 4 Reverse Mortgages

Question 1

Introductions

Answer 1

a significant portion of their savings is tied up in the value of the home in which they live

A “Reverse Mortgage” allows an individual to access the equity in his home while still living in it

Question 2

Nature of a Reverse Mortgage

Answer 2

With a reverse mortgage, the individual uses the equity portion of his property for collateral on a loan that only becomes due when he dies, or sooner if he sells his home

As with a regular mortgage, the individual who takes out a reverse mortgage continues to own his home but there becomes a debt obligation on which interest accumulates, although no payments are required until the debt obligation becomes due

House is Collateral

• money made available to the individual is taken as a lump sum
• for people who are at lease 55 years old
• can access 10%-50% of the homes appraised value
• Growth of 6% interest rate

Question 3

Types of Reverse Mortgages: Reverse Annuity Mortgage

Answer 3

Compromised of two parts:

• Mortgage
• Annuity
• Homeowner borrows a lump-sum of money through a mortgage on his property.
• Lump sum proceeds are used to purchase an annuity that provides the homeowner with monthly income payments for the remainder of the homeowner’s life

Question 4

Types of Reverse Mortgages: Line of Credit Reverse Mortgage

Answer 4

• Equity in the home as colatteral
• Line of credit reverse mortgage allows the homeowner to establish a line of credit from which he can borrow funds, at any time.
• interest calculated on the total amount withdrawn

Question 5

Types of Reverse Mortgages: Fixed Term Reverse Mortgage

Answer 5

• provides funds to the homeowner for a fixed period of time often 5-10 years
• interest occurs at the end of the fixed term
• Ideal for an individual who needs a specific amount of money for a short or specific period of time

Question 6

Taxation

Answer 6

When an individual earns income from a non-registered investment, the investment earnings generally represent income subject to applicable taxes

The CRA position is that the annuity would be a non-prescribed annuity, and the income taxable under section 12.2 of the Act

As the mortgage was acquired for investment purposes, the interest on the mortgage is tax deductible, as allowed by subparagraph 20(1)(c)(iv) of the Act, up to the income included under section 12.2.