You have worked your entire life and now you have entered or are entering your golden years. You are excited but at the same time, you may be apprehensive. You may be asking yourself if you will have enough money for your retirement. You may have a “bucket list” of things to do: skydiving, taking that special cruise, helping your son/daughter buy a home, taking-up that special hobby…and your dreams may go on.
A reverse mortgage may be a viable way of giving you the financial freedom to realize those retirement dreams.
Your initial response to the idea of a reverse mortgage may be: “No, I don’t want to be ripped-off” or “I don’t want to lose my home”. I understand this response and unfortunately, much of the negative press about reverse mortgages originated in the US where financial regulations are not as strong as in Canada. Our Canadian financial system received international recognition in 2008 for its stability and ability to weather the effects of the recession at the time.
Today, many Canadians just like you are looking for ways to supplement their income as they enjoy their golden years. All too often, retirees are not fully aware of all their financial options and may think they’re restricted to downsizing their home and leaving the community that they love in order to make ends meet.
Fortunately, a reverse mortgage is a way you can acquire the money you need without having to move or sell your home. You can access up to 55% of the equity in your home as tax-free money. Not only are you are able to retain ownership, but there are no mandatory monthly payments for as long as you live in the home.
Saving enough for your retirement in Canada can be a challenge.
As the average life expectancy continues to rise, retirement savings are being stretched further over many more years.
So whether you’re looking to alleviate debt, increase your monthly cash flow, help out family members, or even take that dream vacation – a reverse mortgage can be a viable option.
Too many retirees restrict themselves from doing the things they truly enjoy, because they believe they do not have enough savings to live out their retirement dreams.
What they often forget is that their golden years are meant to be enjoyed, and those who live the fullest and happiest retirement are those who embrace it! Whether it’s enjoying the company of friends at your favourite restaurant, providing the family with an early inheritance, purchasing a vacation property, or even making a few home renovations.
What is a reverse mortgage?
It is a loan that allows you to get money from your home equity without having to sell your home. This is sometimes called “equity release”. You may be able to borrow up to a certain percentage of the current value of your home. The maximum amount you will be able to borrow will depend on your age, your home’s appraised value and your lender.
How does a reverse mortgage work?
You don’t need to make any payments on a reverse mortgage until the loan is due. This is usually when you move out of your home, sell it or the last borrower dies. You will owe more interest on a reverse mortgage the longer you go without making payments. This may result in you having less equity in your home.
Features of a reverse mortgage
1. You retain 100% ownership of your home. The title and ownership of your home belong to you, not the Bank.
2. Some common uses of reverse mortgages:
- Stay in the home you love.
A recent Ipsos poll found that 93% of Canadians want to stay in their home during retirement. Many are on a fixed retirement income, which can make it difficult without extra financial help
- Eliminate debt repayments
- Increase your monthly cash flow
- Help a child or grandchild
- Enjoy retirement by traveling and dining out more
- Pay for healthcare expenses, renovations or accessibility retrofits
- Give an early inheritance
- Take that dream vacation and more…
3. Some advantages of reverse mortgages:
- The money you get is tax-free. Your loan amount doesn’t impact your Old Age Security or Guaranteed Income Supplement. Meanwhile, your investments grow without being taxed for withdrawing from your portfolio.
- You decide how to spend the money you get. You can use the net proceeds from your reverse mortgage to make home renovations or retrofits, pay unexpected expenses, financially help children or grandchildren, purchase a second property, or take a dream vacation….the possibilities may be as vast as your imagination!
- There are no regular mortgage payments required. Once you decide to leave your home, the interest and principal and any applicable charges are simply paid off from the proceeds of the home sale. As with standard mortgages, homeowners are required to maintain their property taxes, fire insurance, and condominium or maintenance fees.
- No negative equity guarantee. You will never owe more than the fair market value of your home with the reverse mortgage.
- Better financial planning. Giving an early inheritance avoids probate fees, and many people use a home equity line of credit in order to gift an early inheritance. Others liquidate or transfer investments. However, these options may result in loss of earnings or taxes payable when investments are sold.
4. Some disadvantages of reverse mortgages:
I prefer to label these “disadvantages” as “facts” for which you need awareness. You need to understand and have perspective about the structure of the reverse mortgage. For instance, since you are not making any monthly mortgage payments, the interest rate for a reverse mortgage will be higher and your equity will decrease, assuming no increase in your home. However, over time, real estate has historically always increased. Other facts to be aware of include:
- Interest rates are higher than most other types of mortgages.
- The equity you hold in your home may go down as the interest on your loan adds up throughout the years. For this reason, it is not recommended to start a reverse mortgage at the age of 55. The optimal age is around 75.
- There may be less money in your estate to leave to your children or other beneficiaries.
- See the Federal government website for further discussion of other potential disadvantages of reverse mortgages.
Giving an early inheritance
One of the most attractive features of reverse mortgages is that makes it possible to give an early inheritance. Have you ever considered helping your children financially? An increasing amount of baby boomers are gifting their children money for a down payment on their first home or simply gifting them money for other purposes. In fact, according to statistics from Mortgage Professionals Canada, gifts from parents for home purchases have doubled from 7% in 2000 to 15% between 2014 and 2016.
For those who choose to gift an early inheritance, their reason is often as simple as being able to enjoy watching their children use the money to better their life, rather than waiting until after death to bequeath that gift. An early inheritance could help your children:
- Make a down payment on their home
- Pay for your grandchildrens’ educations
- Help start up a business
- Pay for a wedding
Other financial benefits
An early inheritance avoids probate fees (estate administration tax), which can be as high as 1.7%, depending on your province. Gifting income-generating investments can also save you money by lowering your tax bracket. Please consult your tax specialist for more information.
Some myths about reverse mortgages
Reverse mortgages have come a long way. They have evolved from a needs-based product to a solution that many financial planners recommend as an important component of a comprehensive retirement plan. Unfortunately, there are still many misconceptions regarding reverse mortgages.
1. Myth: The bank owns the home.
Fact: You always maintain title ownership and control of your home, and you have the freedom to decide when and if you’d like to move or sell.
2. Myth: You will owe more than your home is worth.
Fact: Clients can qualify for up to 55% of the appraised value of the home, 33% on average. Due to conservative lending practices, you can be confident that there will be equity left in the home when the loan is repaid.
3. Myth: A reverse mortgage is a solution of last resort.
Fact: Many financial professionals recommend a reverse mortgage because it’s a great way to provide financial flexibility. Since it’s tax-free money, it allows retirement savings to last longer.
4. Myth: You cannot get a reverse mortgage if you have an existing mortgage.
Fact: Many of HomeEquity Bank’s clients use a reverse mortgage to pay off their existing mortgage and other debts, freeing up cash flow for you to use as you wish. How great would it feel to be free of regular mortgage payments?
To learn more about reverse mortgages, go to the Federal Government of Canada website.
If you would like to learn more about how a reverse mortgage can benefit you, please contact me and I’ll be happy to answer any questions you may have. I’d be pleased to provide you with more information so you can make the right choice to achieve your retirement dreams!