# Feedback appreciated please.



## marina628 (Dec 14, 2010)

My husband and I have very close friends who are both 74 years old ,they have no kids and plan to die broke.They have a home that is paid forthat is worth $400,000 which they just bought new in 2012 with cash.She went to the bank a few weeks ago and they recommended to her that they get a $260,000 mortgage so they can enjoy the time they have left and the bank lady proposed they put $100,000 in the bank account for the mortgage payments to be paid for next 10 years and just enjoy the other $160,000.
My friend came home and talked with her husband and they are starting to like this idea to do this and live a better life style etc.The bank even printed a amortization for her which shows in 10 years they will owe $211,000 and could still sell the house in 2025 and have nearly 200k in cash to pay for retirement care etc.
She asked me what I think and I really don't know ,he has a pension which will give her 100% benefits so if one of them died the income would not change much.They feel they should just live it up for next few years while they can and have no family to leave it to other than some nieces who are in their 50s which obviously is very low priority for them.Personally I am on the fence on this one but they are 74 years old with no heirs so I can see the other side too.


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## dubmac (Jan 9, 2011)

marina628 said:


> My friend came home and talked with her husband and they are starting to like this idea to do this and live a better life style etc.The bank even printed a amortization for her which shows in 10 years they will owe $211,000 and could still sell the house in 2025 and have nearly 200k in cash to pay for retirement care etc.
> 
> They feel they should just live it up for next few years while they can and have no family to leave it to other than some nieces who are in their 50s which obviously is very low priority for them.


Hi Marina...

I think they call this a "reverse mortgage"..no? Not unlike "CHIP" https://www.chipmoney.ca/reverse-mortgage-canada/?gclid=CIyr3aKDisMCFUMLMgodmEYAlQ

In 10 years, this couple will be 84 years old and owing 211K, and have 200K in cash (so says the bank) to pay for retirement care...

1. Can they be sure that the bank's projections of 200K will be enough for them after 10 years? Why not sell the house and buy a 1 bdm condo, and live off the excess. WHo pays for maintenance if the roof needs replacing? I see risk in owing that much money in 10 yrs. Medical and "retirement care costs" will likely go up (how much, who knows?) in the future, with all of the others boomers looking for a spot in the retirement homes. Who wins in this scenario?....the bank wins.

2. What do they want to do while they "live it up"? What would that 20K per year (over 10 years) buy them?...a rental property on a tropical island, or similar location I assume. There are other options, but then, I am quite conservative by nature.

Seems to me that they need a detailed plan on what they plan to do. 
I don't have a problem with the idea of them dying broke...but it would be unfortunate for one to die broke and the other living to 90 and inheriting a financial mess.


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## Spudd (Oct 11, 2011)

For me it would depend on how comfortable they feel on their current income. If they are able to enjoy their lives with their current income, I would not want to add risk and hassle by getting a mortgage. Who knows if they will need to move to assisted living earlier than 10 years? If they need to break the mortgage there would be fees, etc. It will be an added comfort for paying for future care to know they have the whole house nest egg. 

However, if they feel like they're scrimping to get by on their current income and the extra 20k/year would make a big difference, then I think it would be worth doing, because you don't really know you'll need assisted living in the future, and 200k will buy a fair amount of care.


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## fatcat (Nov 11, 2009)

it strikes me as kind of stupid to go from being debt free to taking on a 260K mortgage
they have a 400K asset and they are going to willingly waste 100K of it on interest payments ?

what if the real estate market crashes and their house is worth 60% of the 2014 value or 50% ?

sheesh, why not just rent a really nice condo and spend the whole 400K and hope you die before the money runs out


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## marina628 (Dec 14, 2010)

The house is only 2 years old so safe to assume they don't need any major expenses there in next 10 years .They are comfortable now and think the extra 10-20k a year they would use to travel more than they do now.I suggested they rent something but they don't want to move into a condo or an apartment ,they seem wanting to stay in their own home indefinitely.


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## RCB (Jan 11, 2014)

If they take out a mortgage, spending over the next few years, what happens if one ends up in a nursing home? Then there is a mortgage payment AND a nursing home payment above $2,000 a month.


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## Rusty O'Toole (Feb 1, 2012)

My mother ended up in a nursing home at 80. She would have been in exactly the same place, and got exactly the same care, if she had NO money at all. As it was she could afford to pay I think it was $2700 a month but if she had blown every dime instead of scrimping and saving all her life, it would have ended the same way.

In other words they may as well drink it up and piss it away for all the difference it makes. Unless the government runs out of money.


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## fatcat (Nov 11, 2009)

marina628 said:


> The house is only 2 years old so safe to assume they don't need any major expenses there in next 10 years .They are comfortable now and think the extra 10-20k a year they would use to travel more than they do now.I suggested they rent something but they don't want to move into a condo or an apartment ,they seem wanting to stay in their own home indefinitely.


well, that goes against everything i see around me which is that 70 somethings who want to travel tend to want to downsize to rid themselves of the responsibility of the house ... they apparently want it all, travel and the big house and extra money to spend .. ok

i might ask them 2 questions: what if they inconveniently live to be 90 and outlive their money and b) have they ever taken a trip through a provincial nursing home vs. a private nursing home .. i have and i can tell you there is quite a difference between the two

a 260K mortgage will cost them about 130K in interest ... money that is completely wasted on a mortgage they don't need

they strike me as kind of clueless ...


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## My Own Advisor (Sep 24, 2012)

fatcat said:


> it strikes me as kind of stupid to go from being debt free to taking on a 260K mortgage


+1 - because the bank wants more money of course 

I can also see the other side of this, a bit. 

I really don't think $200k is very much for retirement care. Some good nursing homes can cost close to $3-4k per month. 

If they want to die broke, they can put all their savings into an annuity. Nothing leftover with some of those products and they can live it up now with the income.


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## marina628 (Dec 14, 2010)

Fatcat you have very valid point about the quality of a private nursing home ,for myself I would always elect to have private care in my own home as I have seen and heard first hand the differences in quality of care in some home.There are some excellent points here how would they deal with a nursing care bill for one and housing for the other.They are not clueless but I think for them they are trying to figure best way to use up that net worth in their lifetime .Of course to do it perfectly we would need a crystal ball


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## AltaRed (Jun 8, 2009)

fatcat said:


> well, that goes against everything i see around me which is that 70 somethings who want to travel tend to want to downsize to rid themselves of the responsibility of the house ... they apparently want it all, travel and the big house and extra money to spend .. ok
> 
> i might ask them 2 questions: what if they inconveniently live to be 90 and outlive their money and b) have they ever taken a trip through a provincial nursing home vs. a private nursing home .. i have and i can tell you there is quite a difference between the two
> 
> ...


Based on the information given, I tend to agree. Their rationale does not appear rational, especially if they blew all their financial resources on that $400k house and have little other financial assets (beyond their pension). They'll never make it being house poor if life throws them a curveball along the way.


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## Just a Guy (Mar 27, 2012)

Well, I can understand the desire to die broke, but I don't see the point in giving the bank half my savings and only enjoying the other half.

The other thing to consider is medical and living expenses later on in life, which could be significant. 

Dying broke is a great concept, as long as your timing is perfect, spending your money too soon can leave you living broke in old age...

What may be a better solution, not that I'm a fan of them, is to sell the house and buy an annuity at least then they'll have money for life.


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## kcowan (Jul 1, 2010)

If they have any savings, maybe they should spend them first.

How about a charitable remainder trust? The charity takes the house and gives them an annuity payment for the rest of their lives? 

I would rather have a charity get the money rather than a bank!


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## marina628 (Dec 14, 2010)

I don't have full financial picture for them ,they asked me what i think on that one aspect.I do know they have some savings but it may be $20,000 or $300,000 ,not sure of that.I think because the husband had a few health issues in last couple years they are starting to think at least one of them may not live much longer and feel they want to 'live it up' a bit.It may be just a phase they are going through and in a few months may forget about it ,I suggested they find a home to rent and sell theirs .They have to drive 2 hours to get to their doctors now so maybe moving back closer to a city would be a smart idea to do as well.


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## Daniel A. (Mar 20, 2011)

Taking a line of credit would be much simpler and leave them in control of the house. 

If one passed away in the next few years what are the chances the other would still want to own the home ?


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## RCB (Jan 11, 2014)

Rusty O'Toole said:


> My mother ended up in a nursing home at 80. She would have been in exactly the same place, and got exactly the same care, if she had NO money at all. As it was she could afford to pay I think it was $2700 a month but if she had blown every dime instead of scrimping and saving all her life, it would have ended the same way.
> 
> In other words they may as well drink it up and piss it away for all the difference it makes. Unless the government runs out of money.


In my father's nursing home, having no money at all would mean sharing a room meant for two, with a curtain as a door. Bottom of the barrel room. This home was built about 10 years ago. My father pays full price for a private room (northern Ontario, $2,200/ month, phone extra), still sharing a washroom with another.


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## fatcat (Nov 11, 2009)

marina628 said:


> I think for them they are trying to figure best way to use up that net worth in their lifetime .Of course to do it perfectly we would need a crystal ball


i don't hold that against them ... we would all like some way to figure out the life-expectancy vs. capital problem

the annuity and insurance makers and sellers have built very profitable businesses on the unpredictability of death

lacking crystal balls, i think it's better to bank on the _possibility_ of living a decent span of years

i would advise them to consider the possibility of living long or maybe seeing a decline in housing values or an unexpected illnesses and taking those things into account as they move forward

fortunately they have you as a friend to bounce these ideas off of


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## naysmitj (Sep 16, 2014)

How much money do they need to do what?
If they want to travel a little and use some of the equity in their home, get a line of credit.
That way, they are not borrowing money and paying interest on it years in advance of possibly using it.
They may also find that living it up in their 70's doesn't cost that much because you don't have the energy to do what you think.


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## OhGreatGuru (May 24, 2009)

This is difficult because it is a life style choice as much as financial. There is nothing inherently wrong with reverse mortgages, but they have risks related to the unpredictability of health and life span.

The safer financial strategy is to divest themselves of the house and move into comfortable rental accommodation. But I can understand their reluctance to do so only 2yrs after buying, and if home ownership is still important to them.

Perhaps the best you can do is to point out to them the bank is not doing them any favours, they expect to make bags of money on the loan. Try to convince them they should be planning now to transition to other accommodation when they can no longer manage (or no longer want the hassle of maintaining) a house. And if it's just a few years down the road, consider a LOC for some of their vacation plans until they sell.


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## Rusty O'Toole (Feb 1, 2012)

Mother had a private room and bath in a brand new facility. We put up a bird feeder outside the window. She liked to watch the birds.


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## andrewf (Mar 1, 2010)

What about mortgaging and then using proceeds to buy an annuity? They would probably get a much higher yield on the annuity than the mortgage interest and principle payments, so it would increase their net cash flow. Also would leave them with some equity in 5 or 10 years if they decide to sell and move into a care facility.


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## marina628 (Dec 14, 2010)

The house was purchased in 2012 when they downsized and moved a bit outside the city so I know there had to be some cash left over when they did the move.I think if she died first he would definitely sell the next day and move to a rental or senior home but she loves her gardening and wont move out of this house now unless health reasons forced them to do so.
You guys are right though the bank seems to be the winner in this situation if the get a mortgage ,probably a heloc would be a better situation but obviously planning to sell and rent would give them not only financial freedom but freedom from the upkeep etc.


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## marina628 (Dec 14, 2010)

Just thought I would update this as I spoke to my friend yesterday afternoon.They went with a heloc of $75000 but allowed the bank to register a higher lien , apparently mortgage fraud was on their list of concerns too .They decided they are going to sell the house in 5 years when this heloc is up and in the mean time do a bit of traveling and enjoying life a bit more ,I am so relieved they did not follow this advise of getting the $260,000 mortgage .


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## kcowan (Jul 1, 2010)

Great solution Marina.


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