Older home-buying couples and collateral charges
Dear Money Lady, I am planning to buy a home with my new partner and I have the money for the down payment or more. My boyfriend, Mike, has no savings, but has the income to get the mortgage. I am currently working parttime, but I don’t make enough to pay the mortgage payment. We each have adult kids from previous marriages. Can you tell me what is the best thing to do?
— Maryanne Dear Maryanne, I am so glad to share your question with our Canadian readers because this is a common event with older couples, especially those divorced and now wanting to start a new life with someone else.
I have seen this before, where one partner may be asset rich — meaning they have the savings, but they do not earn much, and the other partner may not have the savings, but earn a larger income. When you go into the banks, they are only interested in facilitating the transaction of setting up a new mortgage. However, without a clear division of the asset, if you were to split in the future, there are a lot of grey areas.
Also, the partner who makes more money most likely would end up paying more towards the monthly expenses which could be a problem over time.
The other reason I would want you to clearly define your new asset together is in the event of a death. What happens if the adult children of the deceased force the sale
of the home to capture their inheritance? And, if you were to separate, would you sell the property and split the proceeds equally? What if one partner wants to stay and the other wants to sell? The best solution is a collateral charge. Let me explain why you want this type of product instead of a standard mortgage.
With a collateral charge, you can capture 100 per cent of the value of the residence (I know you don’t require that much equity, but stay with me and I will explain why you want it). A collateral charge also has no term or renewal, so, once you get approved for it, you can keep it for the next 30 years if you like, even with a zero balance — always available to you in the future if needed.
The other reason I would recommend this product is that you can clearly define the percentage of ownership and, if needed, a collateral charge can be split into multiple segments to be used for investments, business loans, helping family, etc., (with most segments being set up as tax write-offs on the interest of individual segments).
In your situation Maryanne, I would suggest you split the cost of the purchase 50/50. You put down as much as you can on your 50 per cent ownership and then set up a segment for your remaining amount owing. If you have enough for the full 50 per cent ownership, then I would suggest you put it all down, so you do not have a loan payment.
Mike would have a segment for the remaining 50 per cent and have a monthly payment that he would be responsible for. Each segment will be labelled with your names and clearly defined. However, title will be registered equally under the full collateral charge.
If Maryanne were to put down the full 50 per cent, she could now have the 50 per cent available credit in the equity of the collateral charge should she need this in the future. I would suggest Mike take out separate life and disability insurance on his loan so that, if he were to die, the debt would be paid out.
Better still, it is best if you both have additional life insurance naming each as beneficiaries. By doing this, you will eliminate a forced sale if one were to die, allowing the surviving partner enough funds to pay out half of the value of the property to their partner’s estate and continue living in the property debtfree.
With the collateral charge now free and clear with no debt, the surviving spouse does not have to worry about qualifying for a future loan and can have access to credit should an emergency arise.
Remember, the collateral charge has no term or renewal and is not a mortgage. Once you get it set up, you are free to use it as you please, changing segments, paying it off, drawing it down again or leaving it for years with a zero balance.
You can even switch it to interest-only payments, if needed.
For more information on how a collateral charge works and how you can qualify, watch my You-Tube video: “What is a Collateral Charge/ Ask the Money Lady.”
Good luck and best wishes, Christine Ibbotson