A reverse mortgage is a viable money strategy that allows some retirees to age-in-place, deferring the need to move to an expensive seniors living complex.
As a senior, is your home equity really the sacred cow you have grown up to believe or can it be a tool to allow you to age-in-place, with dignity and in the comfort of your own home?
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.
What is a Reverse Mortgage?
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, perhaps the nay-sayers want to walk a mile in your shoes first?"
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!
How Reverse Mortgages Work for Retirees
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 only needs to be repaid by the homeowners when they sell or move out. 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 1.5 to 2.0% higher than normal mortgage rates and the interest accumulates over time, with the loan to be repaid only upon sale.
Pros and Cons of Reverse Mortgages
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 $2500 in set-up costs including appraisal and legal, similar to any refinance mortgage cost.
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). Click here for more info including pros, cons and myths regarding reverse mortgages.
The demand for reverse mortgages and home equity release products in Canada is on the rise, mirroring the trend seen in countries like the USA, Australia, and the UK. Despite this growth, it is crucial to note that these options are well-regulated by the Canadian Government (OSFI), ensuring that safeguards are in place. Consult with a Certified Reverse Mortgage Specialist to determine if tapping into your home equity is a suitable choice for your financial needs.
About the author - Chris Richards is a licensed mortgage broker since 2008, a ‘Certified Reverse Mortgage Specialist’, and a senior himself.
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