Recently, I joined the Seniors Resource Council of Alberta. This organization is focused on offering senior-friendly products and services dedicated to improving the quality of life for seniors in Alberta.
One theme I’m recognizing as I start with this group is that many seniors are feeling unprepared for their retirement. And sadly, it’s not surprising. There are near-endless statistics about Canadians not having enough savings for their retirement. The government is even looking at pushing back the retirement age, even though that will likely have little to no impact on retirement savings.
Now, there is no one-size-fits-all strategy for retirement, but a potential option for yours, if you own your home, is a reverse mortgage.
A reverse mortgage is a way to access the equity in your home, turning it into tax-free money to do with as you wish.
Your home equity becomes cash you can access without a monthly mortgage payment, giving you financial security and freedom for your future.
How Reverse Mortgages Work
A reverse mortgage allows you to access up to 55% of your home’s appraised value. There are various reverse mortgage products, so depending on what you’re eligible for, you can access this equity through a lump-sum amount or as a lump-sum with advances over time.
You do not have to make regular mortgage payments as long as your home is your primary residence. You must continue paying regular property taxes, home insurance, and maintaining your home.
You can take advantage of the equity you’ve worked hard to build, while also:
Maintaining full ownership of your home,
Customizing how you access your funds with a one-time lump sum amount or installments that may include a lump sum,
Protecting your investment portfolio for an extended period of time,
Accessing tax-free funds that do not affect your OAS or CPP.
What Can You Use Your Reverse Mortgage Funds For
The funds from your reverse mortgage can be used in any way that you need. However, there are four typical expense groups that people use a reverse mortgage for:
Alleviate Debt
If you need help paying credit card bills and don’t want to dip into current savings or investments, a reverse mortgage can be a good option. Additionally, you may want to help your children with a down payment on a home.
Pay For Unplanned Expenses.
If you encounter unexpected home repairs, such as fixing a leaky roof, needing to retrofit your home for mobility reasons or hiring in-home healthcare assistance, you can use the funds from your reverse mortgage for these expenses.
Maintain Standard Of Living
When you retire, you want to maintain if not improve your standard of living. However, there can be an adjustment period after retirement if you’re experiencing a shortfall in your retirement funds. A reverse mortgage can fill in these shortfalls and maintain your current cash flow.
Travel
Like many retired Canadians, you finally have the time to pursue the things you’ve always wanted to do when you’re retired, such as travel. But, if you do not have the funds to support these activities, a reverse mortgage can fill in this gap. You can even look at using the funds to purchase a vacation property and get out of our cold Canadian winters.
Paying Back a Reverse Mortgage
The biggest question I get about reverse mortgages is how you repay the loan since you’re not required to make regular payments. You pay back your reverse mortgage when you move or sell your home.
Because home values have historically increased over time, by the time you are ready to leave your home, its sale value will be enough to cover the balance of the reverse mortgage.
According to one of my lenders, Home Equity Bank, 99% of their CHIP Reverse Mortgage clients have equity remaining in their homes after the loan is repaid.
Eligibility
The following factors are assessed to see if you are both eligible and qualify for a reverse mortgage in Canada.
A Canadian homeowner,
Homeowners must be at least 55 years or older,
A minimum appraised value of $150,000*
*Other reverse mortgage types may require a higher appraised value.
Qualifying Factors:
Where your home is located,
The type of home (condo, townhouse, detached, etc.),
The appraised value of your home,
The condition that your home is in.
Like all mortgage products, a reverse mortgage can be customized to what you need.
What Are The Associated Costs of a Reverse Mortgage?
The costs associated with a reverse mortgage include current interest rates and fees, which vary. Other costs for reverse mortgages can include:
Appraisal - Required. Costs between $300 - $500 for most properties
Independent Legal Advice - Required. Costs between $500 - $1,500
Property Taxes - Required. Must be up-to-date and can range based on property type and municipality.
There are several key advantages to taking out a reverse mortgage. You get to stay in your home and keep full ownership and title, without having to move, sell or downsize.
You also have more financial freedom without having to dip into your retirement savings.
But as I alluded to before, a reverse mortgage isn’t the silver bullet for your retirement strategy. While I really like this product, it should be supplemental to your other retirement savings and investments.
If you have questions about a reverse mortgage, please give me a call or send me an email. We can determine if this product fits well with your retirement goals.