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My daughter is 60, divorced, owns a house, perhaps $800,000 house value. She has a small mortgage and no savings of any kind. She lives on a line of credit and a credit card. Her only income is about $300 to $400 monthly CPP.
She is wondering how best to manage. Should she sell now and rent for a short term?
She is worried about investing since CDIC guarantees only up to $100,000.
The next five years will be rough until OAS GIS kick in. Even then, she will be short of money. I have funds but may need that to cover possible care for myself so I cannot help her now. But if I don’t need that money, she will inherit and should be okay in her later years.
(Letter was edited for length.)
I’m sorry to hear you have been stressing about your daughter’s financial situation, Joan. I guess you always worry about your kids, even when they are 60! I do think there are several potential solutions to her problem.
I assume she has already explored increasing her line of credit, otherwise she would not be using her credit cards. Banks are hesitant to lend to people without income even if they have home equity. But I recommend she start with the bank.
Alternatively, she could consider a reverse mortgage from HomeEquity Bank or Equitable Bank. A reverse mortgage is a borrowing option for homeowners aged 55 years and older. You can borrow up to 55% of your home’s value. However, given your daughter’s age, Joan, she will probably be limited to less than 50%.
A reverse mortgage can provide a lump sum to pay off her line of credit and credit cards and top up her bank account. She can also take payments over time to supplement her cash flow.
The catch with a reverse mortgage is the interest rate tends to be higher than a traditional mortgage or from a line of credit. But if it allows your daughter to stay in her home longer, it could be a good option. Especially if she is going to be racking up more credit card debt at much higher interest rates otherwise.
She could sell and rent, Joan, but I think the key is how important it is to stay in her home for a few more years. She could even try listing her house for sale with a condition that she wants to lease the property back from the purchaser. That may limit the potential buyers, but she could also end up with a landlord who values the instant tenancy of someone who obviously loves the house. Then she gets cash and can stay in her home as well. She will want to talk to a real estate agent and a lawyer and consider a long-term lease of several years to try to reduce the risk of having to move.
If your daughter does sell the house, the $100,000 Canada Deposit Insurance Corporation (CDIC) coverage limit you mention should not be a limiting factor. CDIC is a crown corporation that insures deposits in the event of a member failure. Some banks have the ability to issue savings accounts or guaranteed investment certificates (GICs) from multiple divisions that are all member firms of CDIC. RBC, for example, has Royal Bank of Canada, Royal Bank Mortgage Corporation, RBC Investor Services Trust, Royal Trust Company and Royal Trust Corporation of Canada, so can multiply the $100,000 limit.
Credit unions across the country have different insurance limits depending on the province. There is a $250,000 Deposit Insurance Reserve Fund (DIRF) limit for members, for example. BC, Alberta, Saskatchewan and Manitoba insure 100% of eligible deposits at member institutions.
Another way to ensure investment insurance coverage: She could have money at multiple institutions to make sure she does not exceed the applicable limits.
GIC rates have started to move higher recently. She could generate a higher long-term return investing in stocks, as well as fixed income investments like GICs and bonds.
Even after paying off her debt, she would likely have hundreds of thousands to invest after selling her house for $800,000. This could give her access to a lot of different investment advisors and portfolio managers both at the bank and with private investment firms.
As you have noted, Joan, her Old-Age Security (OAS) cannot start until age 65. It sounds like she started using the Canada Pension Plan (CPP) early at age 60. Guaranteed Income Supplement (GIS) is payable to low-income OAS recipients. And if your daughter stays in her house and CPP is her only income, she will qualify for GIS in five years.
If you want to help her out, Joan, you could consider lending her some money. You could do so as a secured loan backed by her home equity. A lawyer could register the loan as a mortgage.
From a legal perspective, if you needed to call the loan, and your daughter could not pay, you could force the sale of her home (power of sale). That may not be something you want to do to your daughter, but you could lend her money on the condition that if you ever did need it, she would need to be ready to get a reverse mortgage to pay you off or sell her home to pay you back.
You could even charge an interest rate that was in line with what your daughter might otherwise pay on a reverse mortgage. Perhaps slightly less, so it was advantageous to her. And if you are a GIC investor, you would probably earn a higher return on the mortgage interest than a GIC, so you could benefit as well—a win-win situation. You’re not obligated to charge interest though, so you could lend it to her at 0%.
However much you want to help your daughter out, I think you are doing the right thing to worry about yourself first, Joan. Nobody knows how long they are going to live, and long-term care costs could be non-existent or could last several years. Your daughter has options, both on her own and with your help.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.