Want a subject matter everyone has a strong opinion on other than politics and religion? Look no further than the Reverse Mortgage program available to Canadian seniors, a subject misunderstood by far too many retirees.
As a financial advisor to a large group of seniors I have seen this product successfully create an unexpected source of wealth to allow retires to maintain or even enhance their standard of living.
What exactly is a Reverse Mortgage?
A reverse mortgage is a mortgage loan, usually secured by a residential property, which enables the borrower to access the unencumbered value of the property. The loans are typically promoted to older homeowners and do not require monthly mortgage payments. Wikipedia
What are the advantages?
#1 – You maintain ownership of the home – for life!
- There is no risk to losing your house like in a traditional mortgage where a monthly payment is expected.
- The mortgage lender can not take the property away for any reason, and this key fact is written in the contract.
#2 – You make no payments in your lifetime
- Unlike a traditional mortgage or Line of Credit, which require at minimum the repayment of the interest, there are no payments to make.
#3 – The money is tax free and can be used for anything
- Technically a Reverse Mortgage is a loan and thus it is not considered income, which means that the proceeds are received without negative tax implications
- The proceeds can be used for home renovations, large unexpected medical expenses like in home care/nursing, reinvested in another real estate project with children, or invested in stocks & investment funds to produce dividend and capital gains income.
#4 – You are protected if the real estate market drop
- Even with a collapsing real estate market the mortgage is capped to what the home is worth – the debt can not exceed the cap.
What are the Disadvantages?
#1 – Higher interest rates than a traditional mortgage
- The amount borrowed is still subject to interest rates, and during periods of higher-than-normal rates set by the Bank of Canada the equity in the home could be reduced faster
#2 – Eligibility restrictions
- All homeowners on title must be age 55 or older
- Can only be done on your principal residence, which does not include vacation properties or mobile homes
- Hobby farms or acreage are excluded
- Restrictions for those who already carry a high debt load or have an existing mortgage or Line of Credit
#3 – A reduced Estate for inheritance purposes
- If the family home is to be the primary inheritance for your children, the value will be eroded as the years go by
- Should leaving a larger inheritance for children be a concern. then life insurance can cover this risk. Another option is to have the children as beneficiaries on TFSAs and other Non-Registered assets like Segregated Funds which allow a named beneficiary
Who benefits most from a Reverse Mortgage?
- This is an ideal product for a single senior or retired couple without children, as the need to leave an inheritance to another generation is not there. So why not maximize your retirement lifestyle if there is not a pressing need to leave a larger estate
- Beneficial to those without a traditional pension plan sponsored by their employer who have relied only on their own RRSPs and other investments. Not having a guaranteed lifetime income that a pension plan would provide, often means the individual requires alternate investments to make up the shortfall later in life
- It is particularly appealing for those who, because of age and/or income limitations, are restricted from getting a traditional mortgage or Home Equity Line of Credit (HELOC)
As with any other complex financial product, discuss the pros & cons with your advisor and get quotes from at least two Reverse Mortgage providers to examine setup costs and interest rates.