A Reverse Mortgage can make a Comfortable Retirement Possible

Cash is King. In retirement, it is all about cash flow management.

As we are all aware, it is cash that pays the bills. Without cash flow, whether from employment, investments, or some other form, we will be in financial trouble. In our retirement years, lack of adequate cash flow can (will) be catastrophic if there is no plan B.

According to the Deloitte Report, Running out of Time, 78% of retirees are going to have to dramatically adjust their lifestyle (reduce spending) if they don't want to outlive their retirement savings - that should be / is a shocking revelation. 

For those that own their own homes, there is a plan B. There is the opportunity to have a comfortable retirement, or to at least to achieve a better retirement outcome. It's called a Home Equity Release or Reverse Mortgage.

A Home Equity Release / Reverse Mortgage is a financial product that allows Canadian homeowners aged 55 or older to convert a portion of their home equity into tax-free cash without selling their home and without the requirement to make any mortgage payments. 

Here are the primary features of a home equity release / reverse mortgage loan in Canada.

1. Eligibility Requirements

• Age: Homeowners must be at least 55 years old.
• Home Ownership: The property must be the homeowner's primary residence for at least six-months per year.
• Home Equity: Sufficient home equity is required. Equity is the difference between what your home is worth and how much you may still owe on it.

2. Loan Amount

The amount available to borrow typically depends on the homeowner's age, the home's appraised value, and the location of the property. Generally, older homeowners can access a larger percentage of their home’s value. Bonus - as you age, your access to funds increases automatically.

3. Tax-Free Funds

Funds received from a reverse mortgage are tax-free and can be used for any purpose, such as home renovations, paying off debts, or covering living expenses. It will not reduce or in any way impact your OAS, CPP, or GIS benefits. 

4. Monthly Payments are Optional

Homeowners are not obligated to make monthly mortgage payments, but they can pay accruing interest should they chose. Instead, the loan plus accrued interest is repaid when the last homeowner sells the home, moves out, or passes away.

5. Interest and Fees

Interest on the loan accumulates over time and is added to the balance of the loan. There will be additional fees including appraisal, legal, and administrative charges, which can be covered by the equity release funds. Homeowners also have the option to partially (or fully) repay the loan and accrued interest, for example if an inheritance was received.

6. Repayment Conditions

The loan becomes due when the last homeowner sells the home, moves out permanently (i.e., to a nursing home), or passes away. The estate typically has up to 6 months to repay the loan after the homeowner’s death. Provided that the homeowner has abided by their loan conditions to keep their property insurance and taxes paid-up, and to maintain the property, they will never owe the lender more than the fair market value of their home, called a No Negative Equity Guarantee.

7. Ownership Retention

Homeowners retain ownership of their home and can live in it for as long as they choose, provided they meet their loan obligations, which include maintaining the home and keeping up with their property tax and home insurance payments.

8. Impact on Estate

The reverse mortgage may reduce the amount of equity left in the home, which can affect the value of the estate passed on to heirs. Heirs can repay the loan and keep the house or sell the house to repay the loan.

9. Government Protection

Canadian reverse mortgages are subject to regulation, ensuring protections such as mandatory independent legal advice to help homeowners understand the terms and implications. 

10. Providers

In Canada, reverse mortgages are primarily offered by two institutions: HomeEquity Bank (CHIP Reverse Mortgage) and Equitable Bank (Path Home Plan). As well, there are two newcomers, Bloom Financial and Portfolio+. Multiple providers is good for competition.

Conclusion

Reverse / equity-release mortgages can be valuable financial resources for Canadian seniors looking to access cash while continuing to live in their homes. It is crucial for homeowners to familiarize themselves with these financial tools, and understand how they can fit into long-term retirement planning, as well as the impacts on home equity and estate planning.

Misconceptions about reverse / home equity release mortgage products in Canada

Myth #1 - I will lose my home to the bank.

Not true. You will always own and control your home as long as you want and are able to. As with any mortgage in Canada, when you sell/ move out, you simply have to pay back the mortgage and accrued interest. That's normal. Furthermore, reverse / home equity release mortgage lenders guarantee that you will never owe them more than the selling price or value of your home, when the last homeowner moves out. That's called a No-Negative-Equity guarantee. In other words, if the loan balance exceeds the value of your home when you leave (and you have honoured the terms of the loan agreement), then that's the bank's problem, not yours.

Myth #2 - Home equity release products have limited use during retirement.

Bonkers! Listen, if you had enough money (a.k.a. cash flow) for your day-to-day needs and enough left over for a little quality of life, you would not be reading this page. But if you and your partner are trying to get by on a little pension, OAS and CPP, you are likely struggling with the high cost of living and are researching for solutions. Here are a number of very valid use cases:

• Get get rid of your monthly mortgage payment.
• Pay off lingering loans and credit card balances.
• Come up with the cash to pay your property taxes.
• Finance home repairs or improvements to enjoy or to improve the potential selling price.
• Allow you the option to age-in-home instead of an extended care facility.
• Allow you to actually retire if you are still reluctantly working.
• Get control of your finances.
• Create or increase your pension or investment income streams.
• Most of all, get rid of the fear and worry that you are in financial trouble without options.

Myth #3 - There will be no value left in my property to pass on to my kids as an inheritance.

Not statistically true! Financial institutions are savvy players in the market. While the prospect of your heirs receiving an inheritance might not be their primary concern, they certainly don't want to lose money through their No-Negative-Equity guarantee. In determining the size of the loan to offer you, they employ careful calculations to ensure that the gap between your home's current market value and the loan amount you receive (essentially, your stake or "equity" in the property) remains relatively constant over time. They're essentially wagering that your property's value will appreciate at a rate comparable to the increase in your loan balance. Thus, when the time comes for you to sell or vacate, your equity stake could be more or less similar to what it was when you first entered into the agreement, but of course this depends on your age when you depart. So the bank is happy, and you can pass on your remaining equity as inheritance or use it for other expenses.

Myth #4 - Reverse / equity release mortgage products are too expensive due to high interest rates and fees.

No longer true. The Canadian market now boasts four competitive players in the reverse mortgage / home equity release (HER) sector. This increased competition has led to a noteworthy narrowing of the interest rate difference to as little as 1.5% between traditional mortgages and HER products. Market forces dictate the rates, but it's clear that loans backed by home equity are more cost-effective compared to other financial options like HELOCs, credit cards, and personal lines of credit. Remember, a reverse mortgage is unique because it pays you – flipping the traditional loan dynamic on its head.

Regarding fees, securing a traditional mortgage (the kind you can get when you are employed) comes with its own set of costs – from appraisal and legal fees to mortgage registration and document handling. Reverse mortgages follow this same structure; it's an essential part of the lending process. However, please trust that competition among lenders will insure that these fees are about as low as they can be, and instead turn your focus to the broader picture, which is that a viable solution exists that will help you to achieve a better retirement outcome. Here's a question to think about:

Ask yourself, "with funds from a reverse mortgage, how would my life be better?"

Improving your retirement cash flow can solve so many problems, problems that plague so many.