Are your finances "retirement-ready", or are you a little worried?

Let's break down what retirement looks like for the 3 million Canadian households that are about to enter into retirement in the next decade according to a recent research report by Deloitte called Running Out of Time .

  1. The top 14% or ~430,000 near-retirement households are retirement-ready, meaning they have median assets of $1.75M and will be able to maintain or improve their lifestyle post-retirement and leave a legacy for their family members.
  2. The next 18% or ~540,000 households should be okay in retirement with median financial assets of $550K but only if they are cautious with their spending and willing to compromise on their quality of lifestyle.  Likely they own their own home. 
  3. The following 37% or ~1.1 million households are at risk, meaning low retirement readiness. Households in this category have about $110k in assets and will likely struggle to sustain their retirement lifestyle. Likely they own their own home, but may still have mortgage and other debts.
  4. The bottom third or 924,000 households will need to rely solely upon public support for their retirement income streams such as OAS and CPP to sustain their retirement. This group has median financial assets of $5K, and likely rents or will have to live with family.

Where do you fall in the above categories? For those in categories 2 & 3, this page focuses on strategies and products that may help to produce better retirement outcomes.

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. No Monthly Payments

Homeowners do not need to make monthly mortgage payments. 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.

Here are 10 Use Cases for a Reverse / Equity Release Mortgage 

Which one might benefit you?

1. Supplementing Retirement Income

Scenario: John and Mary, both in their late 60s, have limited retirement savings and depend on OAS & CPP for a good chunk of their monthly income. Out of necessity, they both maintain part-time jobs.

Use Case: They'd both like to quit working and don't really want to sell their home to free up cash, so they learn how to use a reverse mortgage to convert a portion of their home equity into a monthly income stream sufficient to cover their property taxes, home insurance, and utility expenses. Now, part-time work is optional, not a requirement.

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2. Paying Off Existing Mortgage or Debts

Scenario: Alice, age 70, still has an outstanding mortgage on her home and struggles to make monthly payments.

Use Case: She takes out a reverse mortgage to pay off her existing mortgage and other debts, eliminating her monthly payments and reducing her financial burden.

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3. Covering Medical Expenses

Scenario: Tom, age 75, has significant medical expenses due to a chronic illness and his provincial health plan doesn't cover all the costs.

Use Case: He uses a reverse mortgage to access his home equity and cover his medical expenses, ensuring he can afford the necessary care without depleting his other savings.

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4. Home Renovations for Aging in Place

Scenario: Grace, 78, wants to make her home more accessible and safe as she ages, but she lacks the funds for the necessary renovations.

Use Case: She takes out a reverse mortgage to finance modifications such as installing grab bars, widening doorways, and adding a stair lift, enabling her to live comfortably and safely in her home.

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5. Helping Family Members Financially

Scenario: Nataly and Rafael, 78, have adult grandchildren who are struggling to raise a down payment and mortgage-qualify to enter the housing market due to high home prices.

Use Case: They use a reverse mortgage to provide financial assistance to their family, helping to cover down payments and to pay off debts, without jeopardizing their own financial security.

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6. Creating an Emergency Fund

Scenario: Noku, 74, is concerned about unexpected expenses in the future, such as home repairs or medical emergencies, but she doesn’t have a substantial emergency fund.

Use Case: She secures a reverse mortgage line of credit, which she can draw from as needed, providing her with a safety net for unforeseen financial needs while preserving her other assets.

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7. Travel and Lifestyle Enhancements

Scenario: Joshua and Jasmine, both in their early 70s, have always dreamed of traveling the world but never had the financial means to do so.

Use Case: They use a reverse mortgage to access a portion of their home equity, allowing them to fund their travel plans and enjoy a more fulfilling retirement lifestyle without selling their home.

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8. Funding Long-Term In-Home Care

Scenario: Barbara, age 78, requires long-term care but does not have long-term care insurance and her savings are insufficient to cover the costs.

Use Case: She takes out a reverse mortgage to generate the necessary funds to pay for in-home care services, ensuring she receives the care she needs without placing a financial burden on her family.

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9. Estate Planning

Scenario: Akihiko, 75, wants to ensure that his heirs receive an inheritance but also needs additional income during retirement.

Use Case: He takes out a reverse mortgage and uses a portion of the funds to purchase a life insurance policy. This strategy allows him to provide for his current financial needs while ensuring his heirs receive a tax-free inheritance through the life insurance policy.

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10. Starting a Small Business

Scenario: Laura, 70, has always dreamed of starting her own small business but lacks the startup capital.

Use Case: She uses a reverse mortgage to access the necessary funds to launch her business venture. This enables her to pursue her entrepreneurial dreams and create an additional source of income during her retirement years. If her business is very successful, she can even repay the reverse mortgage lender.

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11. (Bonus Scenario) Purchasing a Smaller Home

Scenario: May and Andrew, both in their early 70s, find their current home too large to maintain, dated, and wish to downsize to a smaller, more manageable property so that they can travel or spend more time with the grandkids.

Use Case: They obtain a reverse-mortgage HELOC on their current home in order to upgrade then sell it. They then downsize to a condo-townhouse, financing it with a payment-free reverse mortgage plus some of their previous home's equity. This shift to a maintenance-free living allows more freedom and financial flexibility for travel or spoiling the grandkids.

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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.

HER Graph & Example

 

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.

Will a Reverse Mortgage stop your financial stress?

It might and for sure it doesn't hurt to ask.

We are happy to generate a no-obligation free quote regarding your home equity release options, as well as help you with some retirement cash flow analysis.

start_hereTo start, we need some basic information about you: where you live, age of the occupants, property details, and your objectives. We call this "context." Our equity release reverse mortgage lenders in Canada have different criteria by location and property characteristics; some will apply and some won't depending on you and your property.

As a reminder, to be eligible for the program, *all* of the following criteria must be met:

  • You (and your spouse if you have one, and whether on title or not) are at least 55 years old.
  • Your home is your principal residence (you live in it for 6-months or more each year).
  • The value of the home is at least $250,000.
  • You own the home.

Please complete the form below, then press Submit at the bottom. We will review your submission ASAP and get back to you with advice and available options based on the information you provide. All information is strictly confidential and reviewed by our licensed mortgage brokers.

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