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Disadvantages of reverse-mortgages

For cash-strapped seniors rich in home equity, a reverse home mortgage can provide a steady source of income. This can mean the difference between scraping pennies together or going on that dream vacation. While reverse mortgage loans are, for obvious reasons, becoming very popular these days, they do come with their own set of disadvantages.

Please do not take this the wrong way. We are not saying that you should never get a reverse mortgage. In fact, in the right situation, reverse mortgages are wonderful tools. However, it is important to be aware of the potentail disadvantages of a reverse mortgage.

Reverse Mortgage Disadvantage #1 - It Is Not Free Money

The money you get from a reverse mortgage is not free money. The lender is not giving you a reverse mortgage out of the goodness of their heart. They are in business to make money.

In a regular mortgage agreement, the lender loans you money and you are required to pay that money back, plus interest. For a reverse mortgage, the situation is a little different. You receive a cash stream from your property. When the reverse mortgage agreement is over, you or your heirs must repay all of the cash you have received, plus the interest on it.

Basically, the lender loans you money (and charges you interest on that loan) with the guarantee that they will eventually be repaid - when you sell the home, refinance, or permanently leave the home (i.e. you pass away).

Reverse Mortgage Disadvantage #2 - You Lose Equity in Your Home

You will have less equity in your home. A reverse mortgage allows you, the property owner, to access some of the value of your property without selling it. 'Equity' is the term used to describe the difference between the value of your home and how much you owe on it.

Since a reverse mortgage works on the basis of taking equity out of your house (the money you receive from a reverse mortgage eventually will be repaid out of the value of the home) - the amount of equity in your home will decrease as your reverse mortgage loan increases.

The loss of equity is not necessarily a bad thing - since you will have more cash in your pocket. It is just a trade-off. You will have to decide for yourself whether the money you will get from a reverse mortgage is worth hte tradeoff of less equity in the future.

Reverse Mortgage Disadvantage #3 - More Expensive Than Traditional Home Loans

Another of the reverse mortgage disadvantages is that reverse mortgages tend to be more expensive than traditional home loans. Why is this? Because the reverse mortgage lender assumes more risk when they offer this mortgage product.

While a traditional mortgage lender starts receiving payments from the first month the loan is given, the reverse mortgage lender may not see any return on their money for many, many years - if, for instance, you lived to be 100 years old.

For that entire time (as per the reverse mortgage agreement) they cannot require you to make any payments. Since the risk is greater, there is an increased cost associated.

Reverse Mortgage Disadvantage #4 - You Need Equity to Qualify

You usually need a lot of equity to qualify for a reverse mortgage. A reverse mortgage lender will usually loan you only about 30-80% of the value of your home. This amount varies based on your age, and the specific reverse mortgage plan you choose.

Since reverse mortgages must first pay off any existing mortgages, if you have a loan that is for a greater amount than the reverse mortgage amount you qualify for, you will need to make up for the difference from your savings. If you do not have sufficient money to bring your current mortgage balance below the maximum amount that you could get from a reverse mortgage, you will not qualify for a reverse mortgage loan.

In Summary...

Basically, reverse mortgages are the inverse of a traditional mortgage. Instead of you making payments to the lender, the lender makes payments to you. As a result, and the main disadvantage of a reverse mortgage, your debt (rather than your equity) grows over time.

Although there is no risk that you will lose your home or that your reverse mortgage loan amount will be greater than the value of your home, there is a possibility that (especially if you live to a ripe old age), all the money from the sale of your home will go to the lender.

In other words, there is a possibility that you will use up all the equity in your home. This will not matter to you - but it will decrease or eliminate any inheritance for your children.

While it is a useful tool for certain situations, many financial planners feel that tapping your home equity should only be done if you have exhausted all alternatives. It is not too surprising then that some people have said 'a reverse mortgage is a perfect strategy - if you hate your kids!'

What kind of investments can I typically have in my Self-Directed RSP?

Have you researched having a self directed RSP be funded by someone else's mortgage? If so, then here's some info on what kind of investments you can typically have in your Self-Directed RSP.

* Mutual funds
* Common and preferred shares of Canadian corporations listed on any Canadian and many foreign stock exchanges
* Fixed income securities including bonds, debentures, strip bonds and notes --
o issued by a corporation that has shares listed on a Canadian stock exchange
o issued by a Canadian government (federal, provincial or municipal)
o guaranteed by the Government of Canada
* Many foreign shares and fixed income securities
* Canadian and Provincial Treasury Bills (T-bills), Canada Savings Bonds and Provincial Savings Bonds
* Term Deposits, GICs and cash in Canadian currency
* Options to purchase eligible securities
* Mortgages

Is that really your bank offering you a new credit card?


Identity Theft: Could it Happen to You?

Maybe you never opened that account, or ordered an additional card, but someone else did....someone who used your name and personal information to commit fraud. When an imposter co-opts your name, your Social Insurance Number (SIN), your credit card number, or some other piece of your personal information for their use - short when someone appropriates your personal information without your knowledge - it's a crime, pure and simple.

Are you a Victim?

The signs can be many, but typical indicators that your identity is being used include:

* A creditor informs you that an application for credit was received with your name and address, which you did not apply for.
* Telephone calls or letters state that you have been approved or denied by a creditor that you never applied to.
* You receive credit card statements or other bills in your name, which you did not apply for.
* You no longer receive credit card statements or you notice that not all of your mail is delivered.
* A collection agency informs you they are collecting for a defaulted account established with your identity and you never opened the account.

Identity Theft Statement - What is it?

If you have been a victim of identity theft, the Identity Theft Statement helps you notify financial institutions, credit card issuers and other companies that the identity theft occurred, tell them that you did not create the debt or charges, and give them information they need to begin an investigation. Make as many copies of the Statement as you will need to notify all affected companies. You will need Acrobat Reader to view the statement. Acrobat Reader download

To print a copy of the Identity Theft Statement click here.

It you suspect that your personal information has been hijacked and misappropriated to commit fraud or theft, take action immediately and keep a record of your conversations and correspondence. The following basic actions are appropriate in almost every case.

* Start a log of dates, person(s) that you spoke with and exactly what they said.
* Contact the fraud departments of each of the three major credit bureaus. Equifax: (866) 828-5961, for lost or stolen identification press 1, if you are a victim of identity theft press 2.
Trans Union: (800) 663-9980 except
Quebec residents (877) 713-3393.

* Request that a "Fraud Alert" be placed in your files. At the same time order copies of your credit reports.
* Contact the fraud department of creditors for any accounts that have been opened or tampered with fraudulently. This may include credit card companies, phone companies, banks and other lenders.
* File a report with your local Police or the Police in the community where the identity theft took place.
* Contact PhoneBusters National Call Centre. PhoneBusters is currently central sourcing all pertinent information on Identity Theft to identity trends and patterns, information is also used to assist law enforcement agencies in possible investigations.

Remember: There is no reason to be paranoid; there's just reason to be careful. If someone wants desperately to target you, they can probably get a lot of information about you -- so you just need to minimize the criminal's opportunities to get that information. You can make yourself a harder target and that the best defense. If you are a victim, do not panic, you will not be out any money. The losses will be attributed to the banks and or companies associated with the fraud.

Minimize The Risk

While you probably can't prevent identity theft entirely, you can minimize your risk. Identity theft is on the rise and it can happen to anyone. It can happen to you. By managing your personal information wisely, cautiously and with an awareness of the issue, you can help guard against identity theft.

* Tips on how to minimize your risk.

Bankruptcy statistics in Canada for 2010

Table 1: Total Insolvencies

  Volume % Change 12-Month Period Ending
Q1 2010 Q4 2009 Q1 2009 Q4 2009 to Q1 2010 Q1 2009 to Q1 2010 03-31-2010 03-31-2009 % Change
Newfoundland and Labrador 671 582 674 15.3 -0.4 2 698 2 372 13.7
Bankruptcies 637 552 637 15.4 0.0 2 575 2 297 12.1
Proposals 34 30 37 13.3 -8.1 123 75 64.0
Prince Edward Island 136 174 114 -21.8 19.3 599 482 24.3
Bankruptcies 118 155 110 -23.9 7.3 548 459 19.4
Proposals 18 19 4 -5.3 350.0 51 23 121.7
Nova Scotia 1 297 1 344 1 237 -3.5 4.9 5 540 4 849 14.3
Bankruptcies 1 076 1 110 1 037 -3.1 3.8 4 764 4 204 13.3
Proposals 221 234 200 -5.6 10.5 776 645 20.3
New Brunswick 888 898 839 -1.1 5.8 4 023 3 421 17.6
Bankruptcies 735 731 697 0.5 5.5 3 426 2 921 17.3
Proposals 153 167 142 -8.4 7.7 597 500 19.4
Quebec 10 146 10 228 11 136 -0.8 -8.9 43 124 39 133 10.2
Bankruptcies 7 461 7 679 9 105 -2.8 -18.1 34 239 32 155 6.5
Proposals 2 685 2 549 2 031 5.3 32.2 8 885 6 978 27.3
Ontario 14 566 16 439 15 821 -11.4 -7.9 68 239 57 505 18.7
Bankruptcies 8 750 10 548 11 138 -17.0 -21.4 46 341 41 390 12.0
Proposals 5 816 5 891 4 683 -1.3 24.2 21 898 16 115 35.9
Manitoba 686 734 737 -6.5 -6.9 3 119 2 840 9.8
Bankruptcies 518 559 592 -7.3 -12.5 2 434 2 221 9.6
Proposals 168 175 145 -4.0 15.9 685 619 10.7
Saskatchewan 669 601 606 11.3 10.4 2 715 2 128 27.6
Bankruptcies 456 398 452 14.6 0.9 1 959 1 640 19.5
Proposals 213 203 154 4.9 38.3 756 488 54.9
Alberta 2 917 2 750 2 883 6.1 1.2 12 596 9 020 39.6
Bankruptcies 2 202 2 107 2 467 4.5 -10.7 10 126 7 552 34.1
Proposals 715 643 416 11.2 71.9 2 470 1 468 68.3
British Columbia 3 304 3 083 3 274 7.2 0.9 13 644 10 580 29.0
Bankruptcies 2 524 2 379 2 724 6.1 -7.3 10 819 8 717 24.1
Proposals 780 704 550 10.8 41.8 2 825 1 863 51.6
Northwest Territories 11 5 11 120.0 0.0 47 33 42.4
Bankruptcies 8 4 7 100.0 14.3 40 28 42.9
Proposals 3 1 4 200.0 -25.0 7 5 40.0
Yukon 8 15 6 -46.7 33.3 48 34 41.2
Bankruptcies 5 11 5 -54.5 0.0 41 29 41.4
Proposals 3 4 1 -25.0 200.0 7 5 40.0
Nunavut 1 3 1 -66.7 0.0 10 8 25.0
Bankruptcies 1 2 1 -50.0 0.0 8 8 0.0
Proposals 0 1 0 -100.0 -- 2 0 --
Canada 35 300 36 856 37 339 -4.2 -5.5 156 402 132 405 18.1
Bankruptcies 24 491 26 235 28 972 -6.6 -15.5 117 320 103 621 13.2
Proposals 10 809 10 621 8 367 1.8 29.2 39 082 28 784 35.8

What you should know about bankruptcy

Administrator of consumer proposals

An administrator of consumer proposals is a trustee in bankruptcy or a person appointed by the
Superintendent of Bankruptcy. British Columbia (1-800-663-7867), Saskatchewan (1-306-933-6520) and Nova Scotia (1-902-424-7020) provide administration of consumer proposals. You may wish to contact the appropriate provincial department. With regard to
trustees in bankruptcy, their names may usually be found in the Yellow Pages under the headings of “Bankruptcy” or “Trustees in Bankruptcy.”

Assets acquired during bankruptcy You must assign to your trustee all assets acquired
during your bankruptcy, including lottery winnings and inheritances, so they can be divided among your creditors.

Assets and property
In a bankruptcy, you must assign all your assets to the trustee, except for exempt property, such as basic furniture and tools-of-trade needed to make your living. Exempt property can vary from province to province. Your trustee can tell you what these are.

This is the legal status of a person who declares bankruptcy.

Dealing with Debt -- free download consumer guide

Many Canadians face a financial crisis at some time. Most debt problems are easy to solve. Others need professional assistance. The best way to deal with your financial problems is to admit to them and take control before they get out of hand.

This booklet can help you decide whether you have a serious debt problem. It also gives some suggestions for solving your difficulties and avoiding them in the future. The information in this booklet is meant for individuals only and does not apply to corporations.

Readers are reminded that this booklet is not meant to be used for legal purposes. Its only aim is to give information to individuals who are having financial difficulties.

Download now

Possible Solutions - bankruptcy

Contact your creditors

Explain why you can't make your payments and suggest making lower payments over a longer period of time. You may be surprised by how many creditors are willing to accept such arrangements.

Credit counselling

Credit counselling services are available, but may be different from province to province. Contact a local family or community counselling office or a credit counselling association to find out how to get in touch with such a service. If you have difficulty making a budget and sticking to it, counselling may help you.

Debt consolidation loan

You can ask a bank or financial institution about combining or "consolidating" your debts into one loan. In such a case, the bank or financial institution will pay off all your debts and, in return, you make single monthly payments to the bank or financial institution. Make sure to shop around because interest rates are different. It is important to stop buying on credit. Continuing to use credit could make your debt load too great for you to handle.

Consolidation order

If you live in Alberta or Saskatchewan, you may apply for a consolidation order. A consolidation order sets out the amount and the times when payments are due to the court. The court will distribute your payments to your creditors. This part of the Bankruptcy and Insolvency Act (Part X: Orderly Payment of Debts) lets you pay off your debts over three years and frees you from creditor harassment and wage garnishment. Unlike bankruptcy, you do not lose your assets.

Voluntary Deposit scheme

For residents of Quebec, the Voluntary Deposit scheme (better known as the "Lacombe Law") is similar to a consolidation order. You must make a monthly payment based on your income and number of dependants, to the court. This service is usually available at the local courthouse.

Consumer proposal

Under the Bankruptcy and Insolvency Act you may make a consumer proposal to your creditors to reduce the amount of your debts, extend the time you have to pay off the debt, or provide some combination of both.


If none of the above methods solves your debt problem, you may choose to declare bankruptcy. Bankruptcy should be a last resort if you cannot meet your financial obligations through affordable payments over a specific period of time.

Bankruptcy is a legal process performed under the Bankruptcy and Insolvency Act. Because of your inability to pay your debts, you assign all of your assets, except those exempt by law, to a licensed trustee in bankruptcy. This process relieves you of most debts, and legal proceedings against you by creditors should stop.

Recognize the danger signals - bankruptcy

You have a debt problem, or are going to have one, if:
  • you continually go over your spending limit or you use your credit cards as a necessity rather than a convenience;
  • you are always borrowing money to make it from one payday to the next;
  • your wages have been garnisheed to pay for outstanding debts;
  • you pay only interest or service charges monthly and do not reduce your total debt over many months;
  • creditors pressure you for payment, threaten to sue or repossess your car, furniture or television, or hire a collection agency to recover the money for them; or
  • utility companies cut off service because your bills have gone unpaid.