As a senior, is your home equity really the “sacred cow” you have grown up to believe?
Besides falling, the number one fear for many seniors is not having enough money to pay their day-to-day living expenses as they grow older. For those who still own homes, likely 90% of your net worth is the equity in your house while investments, RRSPs and TFSAs will make up the last 1/10th. The fear is real - only 30% of seniors have some sort of pension plan to fall back on, and CPP/OAS pays only about $1200/mo.
A reverse mortgage is a product that allows homeowners aged 55+ to access 10-50% of the equity in their home (without selling) as either lump sum or over time with no requirement to make monthly payments nor to qualify based on income, credit, or health. While some might argue with the prudence of tapping into your home equity, what else are you going to do with it? To the retired or retiring homeowner who is short on cash/income and doesn’t want to sell/move just yet, obtaining a reverse mortgage is an excellent option to consider and potentially a stress reliever for their adult offspring, who might otherwise have the financial burden of providing care for their aging parents!
Here’s what you need to know: a reverse mortgage enables homeowners to continue living in their homes at modest cost while converting some of their home equity into cash or extra income. Simple uses for the money might be to keep the home repaired, pay property taxes, retire debt, meet day-to-day expenses, provide for in-home care, or fund some emergency or other extended care requirement. At a more complex level, funds could be used for life insurance and estate planning objectives. With a reverse mortgage, the loan need not be repaid by the homeowners unless they wish to sell and move. In any case, the homeowners (or their estate) can never owe more than the fair market value of the home.
Unlike RIFF income, the money received is not taxable so no pension claw-back risk. If the cash is invested, the interest expense is tax deductible. Interest rates are about 3% higher than normal mortgage rates and the interest accumulates over time, with the loan to be repaid only upon sale.
As with any mortgage product, there is an application process but no employment, credit or health requirement, just a minimum age of 55 for the property owners. The equity that you can access is a function of your age, with older being better! There is about $1500 in set-up costs including appraisal and legal.
In terms of reverse mortgage drawbacks, in some housing markets with limited price appreciation, interest could accumulate at a rate faster than the property value appreciates, thereby eroding the overall equity in the property. When the homeowner does sell (hence repay the loan), there might be little equity left over for them (or their offspring).
The market for reverse mortgages is growing, it is regulated by the Canadian Government (OSFI), and safeguards exist. Talk to a Certified Reverse Mortgage Specialist to see if tapping into home equity is right for you.
About the author - Chris Richards is a licensed mortgage broker and ‘Reverse Mortgage Certified’