Need to Increase Your Retirement Cash Flow?
January 17th, 2017
Retired people sometimes find themselves in a cash bind, but there might be a solution for homeowners in the form of a reverse mortgage. You’ve probably seen ads on television or in magazines about this type of mortgage and wondered if it could work for you. Reverse mortgages can be a useful tool for seniors who have built up equity in their home and are looking to supplement their cash flow in retirement but they are not for everyone.
How it works: Depending on your age, marital status, and the property, you can unlock as much as 40 per cent of the appraised value of your home. (See below for additional requirements.)
Let’s say you’ve paid off – or nearly paid off – a conventional mortgage and the home is valued at $300,000. You could wind up with a tax-free $120,000 cash advance. You can take the money in a lump sum or in instalments over the time you remain in the home.
Payments aren’t due until the home is sold or the surviving spouse dies, although you can opt to pay the mortgage earlier. The lender makes its money by recovering the principal and interest when the home is eventually sold.
On the face of it, these mortgages appear to be a good deal for several reasons:
- The money received is not taxable.
- The cash advance doesn’t affect government benefits programs such as Old Age Security and the Guaranteed Annual Supplement.
- Payments are deferred as long as you remain in the house.
- The mortgage will never exceed the fair market value when the house is eventually sold.
- You can use the money any way you want (in fact, you can use the money to buy an annuity or purchase life insurance to pay off the reverse mortgage, which means you can still leave the home free of debt to your heirs).
- You can still sell the house if that becomes necessary, although there may be an early repayment penalty.
- If you choose to pay the mortgage interest annually, the payment may be tax deductible if the borrowed money is invested.
However, before deciding a reverse mortgage is the tool for you, there are some disadvantages to consider:
- Interest rates are as much as two percentage points higher than on a conventional mortgage. For example, if conventional mortgage rates are five per cent, a reverse mortgage could cost you seven per cent. The rates are set annually and based on the rate for one-year Government of Canada bonds.
- Interest continues to accumulate, so in theory the loan, plus interest, could eventually exceed the value of your home. If you sell the house, proceeds will be used to repay the debt and you would have nothing left.
- Set-up, appraisal and legal fees can run from about $1,800 to as much as $2,300.
- You cannot move to another home and keep the loan, which means you can’t rent out the place and still keep the reverse mortgage cash advance.
Proceed with Caution: If you think a reverse mortgage might work for you, consult with your accountant first. Generally, a reverse mortgage is a last resort alternative for homeowners.
What Is a Reverse Mortgage?
A reverse mortgage is a loan secured by a home, like any other mortgage. Unlike a regular mortgage, no re-payment of the loan is required until the home is sold, the last surviving spouse dies, or the owner moves out.
- You must be at least 62 years of age.
- The home must be your principal residence.
- Any existing mortgage must be paid off by the proceeds of the reverse mortgage.
Why Is It Called a “Reverse” Mortgage?
A regular mortgage balance decreases over time as payments are made, until finally it is paid off. In a reverse mortgage, the balance increases over time due to interest charges. This is the reverse of a regular mortgage.