So you’ve retired at the age of 67. You’re eligible to take your Canada Pension Plan (CPP) and your Old Age Security (OAS). You’ve got some money that you put away in RRSPs. You also discover that you’re eligible for a Guaranteed Income Supplement (GIS) because your annual income is very limited.
Fortunately, you’ve paid off your house and it is now valued at $1,500,000. You’d love to be able to access some of the equity in your home, but how can you do this without selling it relocating to something smaller and less costly? Not only is moving a chore, but you’d also be subject to land transfer taxes, real estate fees and moving costs. This can erode a significant amount of the equity left in your home.
If you’re in this situation, a reverse mortgage could work for you.
A reverse mortgage allows you to access the equity in your home to help supplement your retirement income and offset your living expenses. It’s designed for individuals who own their home outright, but have limited disposable income and don’t want to downsize.
Someone who is retired and working with a fixed income may have difficulty getting approved for a mortgage or a line of credit from a conventional lender such as a bank or trust company: Reverse mortgage lenders will give money to the owners of the house. They may receive a lump sum, monthly increments, or receive payments through an annuity. Unlike a mortgage or line of credit, there are no monthly interest payments due.
The owners are still responsible for maintaining the home and property, and paying their property taxes.
A reverse mortgage isn’t for everyone, but those who can benefit from it can greatly increase their standard of living if their income wasn’t subsidized by the equity in their home. Here are some of the advantages of a reverse mortgage:
- Because it is not a conventional loan, the homeowner doesn’t have loan payments to deal with every month
- The homeowner has the ability to turn the equity in their home into cash without having to sell the house
- Similar to a home equity line of credit, the owner doesn’t have to pay tax on the money they borrow
- The money they get from their reverse mortgage doesn’t qualify as income, so it doesn’t affect the Old Age Security or Guaranteed Income Supplement that they may be receiving (qualifying for these benefits are subject to the amount of income that you receive every year)
- You are still considered the owner of your home
- There’s flexibility on how you receive the money, whether in a lump sum, monthly installments or in the form of an annuity
This sounds like a great option for retirees, so why don’t more individuals look at this as an option in their retirement? Well, reverse mortgages do have some downsides:
- Interest rates are quite a bit higher than conventional mortgages or lines of credit
- The equity in your home will diminish as the interest on your reverse mortgage accumulates
- Your estate will have to repay the loan and the interest in full within a certain period of time
- There will be less money to leave to your children or other beneficiaries after your home is sold and the reverse mortgage is repaid.
For many retired couples, the equity they have in their home is their biggest financial asset. The reverse mortgage allows them to access this equity without displacing them from their home. It can provide a vital supplement to their retirement living that helps them avoid having to sell their home and relocate to something significantly smaller, or perhaps rent.
It may not be the perfect solution, but a reverse mortgage provides enough flexibility to help older people live out the remainder of their lives with dignity.