# Depleting the estate and then going negative



## james4beach (Nov 15, 2012)

I'm familiar with traditional retirement planning, but I wonder if something like this is also feasible.

Let's say there is a 70 year old single retiree with no dependents. Their net worth is about 1M, of which a few hundred K is tied up in real estate (this includes mortgages). One option is to liquidate the real estate and downsize, renting an apartment perhaps. That could work.

However the retiree does not like the idea of giving up the home and will probably stay in the house. In this scenario, the savings is not enough to provide the retirement income they need so they'd be in real trouble, or get used to a sharp decrease in retirement income.

What if the retiree stays in the home, but takes on new debt -- more mortgage or LoC. It seems that this could provide enough cashflow for all their retirement needs. The estate would end with a negative net worth, but I think they were going to deplete the estate in any case.

Is this feasible? Do people do this?


----------



## Mookie (Feb 29, 2012)

First off, if you're 70 years old, with a net worth of $1M, with maybe $300K of that tied up in your house, you're not really doing too badly, assuming you have some modest pensions coming in, and you don't have any expensive habits in retirement.

The specific example aside, a reverse mortgage would be an option to unlock some of the cash tied up in the primary residence, although the lender would never let the balance of the reverse mortgage exceed the value of the property. Personally, I don't like the idea of reverse mortgages, and would consider all other options before going this route.

As far as I am aware, other types of loans would probably also be hard to obtain if a person had very low net worth, and just minimal pension income. This would make it very hard to borrow enough to get to a negative net worth position.


----------



## AltaRed (Jun 8, 2009)

Technically, I think the CHIP reverse mortgage is limited to 50% of valuation, so that leaves lots of lender cushion there. I agree no lender is going to allow more conventional mortgage or a LOC without sufficient income stream. 

I suppose if someone at an advanced age had a ton of credit limit on credit cards, that might get one close to negative net worth. I've only known of 2 estates that ended up essentially at zero (or slightly negative) net worth AFTER all the bills were added up, i.e. taxes due CRA, funeral expense, credit cards. CRA got paid first, then funeral, and credit card issuers were left with less than 100% payback. It's actually pretty hard for an average person to end up with negative net worth.


----------



## james4beach (Nov 15, 2012)

Thanks. I didn't realize it was difficult for someone to end up with negative net worth... I assumed it would be as simple as using a LoC.

This same person is currently debating paying off their mortgage, and I'm not sure there's any advantage to doing this. It will eat up lots of their cash, and for what good? There won't be anything worth in the estate anyway.


----------



## humble_pie (Jun 7, 2009)

wouldn't an alternative to a reverse mortgage be to simply borrow from the broker? 

if investor can't already borrow at prime he can easily arrange prime. Would a reverse mortgage be at prime? somehow i doubt

(both sound like poor ideas to me) (a party reverse mortgaging or late-in-life borrowing at prime is surrendering key assets to the bank) (presumably such a party has no heirs)


----------



## milhouse (Nov 16, 2016)

While the BC Property Tax Deferral program doesn't provide income, it at least saves you a chunk of change but while putting you in the red. But it is simple interest instead of compounding which is a bonus.


----------



## james4beach (Nov 15, 2012)

humble_pie said:


> wouldn't an alternative to a reverse mortgage be to simply borrow from the broker?
> 
> if investor can't already borrow at prime he can easily arrange prime. Would a reverse mortgage be at prime? somehow i doubt


Interesting...



> (presumably such a party has no heirs)


Correct, there are no heirs.


----------



## redsgomarching (Mar 6, 2016)

most of the time credit facilities stop at a % of LTV that way the the bank's or lender's @ss is covered. 

it's definitely a way for them to say see ya later and leave all the problems for somebody else.


----------



## Just a Guy (Mar 27, 2012)

Would you be willing to lend me a large amount of money knowing I would never be willing or able to pay it back?

If you wouldn't do it, what makes you think anyone else would be willing to either? These are people who lend money professionally, they are very good at it. There is no way they'd stay in business making loans to people who'd never be able to pay it back. They aren't charities. 

Oh can rest assured, they will only lend a portion of the net worth to ensure they can collect in the end.

Now, that being said, here are ways to borrow more than your net worth (secondary lenders, credit cards, etc.) but they'd be sure they didn't let you get too far into debt before collecting on you...you may be able to juggle minimum payments back and forth for a while, but most 70 year olds probably won't be able to keep it up for long and will likely lose everything earlier than expected.


----------



## yyz (Aug 11, 2013)

Mookie said:


> First off, if you're 70 years old, with a net worth of $1M, with maybe $300K of that tied up in your house, you're not really doing too badly, assuming you have some modest pensions coming in, and you don't have any expensive habits in retirement.
> 
> The specific example aside, a reverse mortgage would be an option to unlock some of the cash tied up in the primary residence, although the lender would never let the balance of the reverse mortgage exceed the value of the property. Personally, I don't like the idea of reverse mortgages, and would consider all other options before going this route.
> 
> As far as I am aware, other types of loans would probably also be hard to obtain if a person had very low net worth, and just minimal pension income. This would make it very hard to borrow enough to get to a negative net worth position.


You could technically end up with a reverse mortgage that exceeds the value of the property. Like everything else it depends on how long you are going to live or stay in the house.They cannot kick you out because of the size of the reverse mortgage but you have to go into it understanding that when you pay out the reverse mortgage you may just hand them the keys and have no residual value left. If you go this route why not take monthly payments instead of a lump sum,it would reduce the interest you are going to accumulate over the reverse mortgage life and provide a steady income stream.

And no reverse mortgage rates are not at prime

https://www.chip.ca/reverse-mortgag...05.299224320.1500739217-1720622492.1500739217


----------



## birdman (Feb 12, 2013)

Right of the top I suggest it won't work for the reasons others have mentioned. However, if you are say 70 and do decide to borrow against your home (conventional mtge, reverse mtge, LOC, etc) and are still around at 85 or so, the value of the home will have theoretically increased well above the value when you applied for the loans. Not likely you would be able to re mortgage or borrow against the home again as your cash flow and debt service ratios would be out of line. At 85 you are probably at the point that you may want to get out of the house anyway. You then sell the home and take any equity that is there and spend it, use it for a classy retirement home, donate it, or give it to me. You then go into a subsidized government care facility or live on the street.


----------



## AltaRed (Jun 8, 2009)

The access amount (LTV) is limited to 55%. The lender is likely to get all his money back regardless of interest buildup. A 6% reverse mortgage rate takes 12 years to double during which time property value likely also appreciates slightly and without the long term interest rate discount. It would be a very rare circumstance for the lender to be underwater...ever.


----------



## james4beach (Nov 15, 2012)

Just a Guy said:


> Would you be willing to lend me a large amount of money knowing I would never be willing or able to pay it back?
> 
> If you wouldn't do it, what makes you think anyone else would be willing to either?


Because many people think that real estate is the best investment in the world, can only go up, will go up in value faster than inflation. Plus there are commissions and incentive systems for loan originators that lead to institutional stupidity in the kind of loans they give.

Plus, there might be optimism that the borrower will reduce their cost of living and pay off the debt, so they might actually think it's feasible for the borrower to repay the loan.


----------



## Just a Guy (Mar 27, 2012)

Well then James, I've got plenty of real estate for you to lend me money on...as soon as I die, you can get it all back, you'll be rich and I can dump my tenants.


----------



## indexxx (Oct 31, 2011)

milhouse said:


> While the BC Property Tax Deferral program doesn't provide income, it at least saves you a chunk of change but while putting you in the red. But it is simple interest instead of compounding which is a bonus.


I was not aware of this program and looked up a bit about it on the CRA site- what are the real benefits and downsides of this? I'll be 55 in two years.

Thank you.


----------



## yyz (Aug 11, 2013)

AltaRed said:


> The access amount (LTV) is limited to 55%. The lender is likely to get all his money back regardless of interest buildup. A 6% reverse mortgage rate takes 12 years to double during which time property value likely also appreciates slightly and without the long term interest rate discount. It would be a very rare circumstance for the lender to be underwater...ever.


Maybe not in this circumstance but if you took out a reverse mortgage at 55 it's quite a bit more possible


----------



## milhouse (Nov 16, 2016)

indexxx said:


> I was not aware of this program and looked up a bit about it on the CRA site- what are the real benefits and downsides of this? I'll be 55 in two years.
> 
> Thank you.


It's a BC Provincial government program. Not sure if other provinces have a similar program.

It's ideal if you have cash flow issues. The positive is that you are freeing up a few thousand of dollars for annual spend via your home equity that would have instead went to your annual property taxes. And the interest rate currently is a low 0.70%, which you won't be able to get at a bank. Ideally, your home value will continue to grow, or at least doesn't drop significantly, so that the value of the house can offset repayment of the loan. 
I suppose you can also be aggressive and try to take advantage of the different in the loan's interest rate and what you can earn investing the money. 

The negative I suppose, is that you are creating a growing debt/lien against your home and likely in retirement. While the outstanding debt will grow from simple interest vs compounding interest, if you defer your property taxes for many years, the outstanding debt can grow to a significant chunk of change. No guarantees that the interest rates stays that low either. And there are some relatively nominal admin fees.


----------



## AltaRed (Jun 8, 2009)

yyz said:


> Maybe not in this circumstance but if you took out a reverse mortgage at 55 it's quite a bit more possible


But why would you take out a reverse mortgage at age 55....even if you could? Those programs are truly for 'seniors' whose net worth is almost entirely tied up in their house and they have few other resources. What I'd do in a situation like that is basically run out of capital investments first, and then as a last resort, get into a reverse mortgage. If you have no investments at age 55, then what the heck is one doing retiring at that age? Work at WalMart for the next 10 years first.


----------



## lonewolf :) (Sep 13, 2016)

Just a Guy said:


> Would you be willing to lend me a large amount of money knowing I would never be willing or able to pay it back?
> 
> 
> 
> .


 Repelling glass steagall made the Clintons a lot of money in payoffs. The banks went from personal banking to transactional banking. Bundling up loans & selling them off. Since the banks have no skin in the game the banks do not care if loan can be paid back. The focus is to bundle up more loans weather the IOUs can be paid back or not. The rating agencies are paid by those wanting their debt rated.


----------



## twa2w (Mar 5, 2016)

Re reverse mortgages.
The % you are lent under a reverse mortgage depends on your age.
If you are 55 you may only get 45% of value. You likely have to be 75+ to get the maximum 55% of value.
Reverse mortgages pay out as a lump sum and you can use the cash to buy a life annuity if you want monthly cash flow, a portion of the annuity payment will be tax free. You never have to sell the house as long as you live even if the reverse mortgage exceeds the value of the house. And yes a small % of reverse mortgges do.

You may be better off to arrange a HELOC for 75% of value of house. Then just discipline yourself to take a fixed monthly withdrawal. You will also have to take another amount each month to cover the interest payment on the LOC. This amount to cover the interest will increase each month. If you live long enough you will run up against the limit and may have to sell your home if the value has not increased and or you do not qualify for a higher limit.
The problem with this is discipline to stick to a small monthly withdrawal.

Which is better may be a mathmatical challenge for those so inclined. Who knows what yhe future medium and short term value of the house will be - or when you will die. Also interest rate increases will shorten the time frame before you hit your LOC limit.

Quite a few small estates are negative but these are usually people who do not own a home. Often the only assets are a few dollars in a bank account, the CPP death benefit, some household furnishings of dubious origin and value. After funeral expenses, the bank ends up writing off the visa card and some other creditor writes off a few hundred bucks.

Sometimes estates have to formally declare bankruptcy and liquidate assets. One example was a businessman I knew who died suddenly at age 45. Had several businesses, a couple in a start up stage with heavy debt. No succession plan and no real key employees to take over so even his successful ventures floundered for weeks before the doors could reopen and months before things could be figured out and organized. This was a serious blow to cashflow, reputation etc and not survivable. 
There was a trustee brought in to liquidate what they could and even the widow had to declare personal bankruptcy IIRC.
He did not qualify for life insurance due to health conditions.
Widow had to sell house, move to subsidized housing and go back to work. His commercial banker and myself helped her move as she could not afford to pay movers. She did manage to keep some very nice high end furniture and personal effects.


----------



## yyz (Aug 11, 2013)

AltaRed said:


> But why would you take out a reverse mortgage at age 55....even if you could? Those programs are truly for 'seniors' whose net worth is almost entirely tied up in their house and they have few other resources. What I'd do in a situation like that is basically run out of capital investments first, and then as a last resort, get into a reverse mortgage. If you have no investments at age 55, then what the heck is one doing retiring at that age? Work at WalMart for the next 10 years first.


Don't ask me ask them that's the age they offer it at

You don't think there are people living at the edge like that?I bet there are


----------



## indexxx (Oct 31, 2011)

milhouse said:


> It's a BC Provincial government program. Not sure if other provinces have a similar program.
> 
> It's ideal if you have cash flow issues. The positive is that you are freeing up a few thousand of dollars for annual spend via your home equity that would have instead went to your annual property taxes. And the interest rate currently is a low 0.70%, which you won't be able to get at a bank. Ideally, your home value will continue to grow, or at least doesn't drop significantly, so that the value of the house can offset repayment of the loan.
> I suppose you can also be aggressive and try to take advantage of the different in the loan's interest rate and what you can earn investing the money.
> ...


Thank you- that's what I figured. Could definitely work for me at that point; I'll keep it in mind and talk to my accountant about it when the time comes.


----------



## OhGreatGuru (May 24, 2009)

james4beach said:


> ...
> 
> What if the retiree stays in the home, but takes on new debt -- more mortgage or LoC. It seems that this could provide enough cashflow for all their retirement needs. The estate would end with a negative net worth, but I think they were going to deplete the estate in any case.
> 
> Is this feasible? Do people do this?


No lender in his right mind is going to lend more than the net worth of a 70-year old. So Plan A is unrealistic.


----------

