A reverse mortgage is a program that is available for Canadian homeowners aged 55 or more, who find themselves “house rich but cash poor”, and are struggling with insufficient income to meet their daily or future needs. The program provides homeowners with tax-free cash that does not have to be repaid, as long as they and their spouse continue to live in their home. They never lose ownership of their home, but the financial institution will have a lien on the property to ensure they get their money back.
With a mortgage, the homeowner pays the lender, but with a reverse mortgage, the lender pays you. Also, regardless of interest rates or market forces, the homeowner (and their estate) will never owe more than the appraised value of the home nor be forced to move.
Costs to set up a reverse mortgage include an appraisal fee, legal closing and administrative fees totalling between $500-$1500.
So far so good? Well we have a better alternative!
A line of credit based upon a completed valuation of your home, could also help you unlock as much as 50% of its value, at a significantly lower rate of interest. These funds can be used to pay off expensive credit card debt, gifted to family members or charity, or invested in tax preferred investments, ensuring you have sufficient monthly income so that you can live out your retirement in comfort.
Another advantage of both programs is that if the funds are then invested in an income paying instrument, a portion of the cost of the loan can become tax deductible.
More importantly, with a line of credit, you will not have to worry about any penalties should you decide to sell your home or cancel the program in the future, as is the case with a reverse mortgage.
One client recently decided that it was worth it to pay a $14,000 penalty to cancel her reverse mortgage, as she would save her children/estate over $12,000 annually in interest payments (on her $400,000 loan), or $120,000 in 10-years, simply by switching into this unique line of credit.
Many people are reluctant to consider these programs , as “conventional wisdom” told them that they should pay down their mortgage as soon as possible in order to save thousands on interest payments. While I agree wholeheartedly with that strategy in the accumulation phase of life, what good is a paid up home if you cannot afford to pay your taxes, or pay for medical expenses or travel , once you are retired and living on a small pension or limited savings?
Done correctly, I can help you enjoy the retirement you always dreamed of. Unfortunately, it might require you viewing your house as an asset as well as a home, in order to make it happen.