It is no secret that with the financial crash of 2008 and subsequent low rate environment, a lot of "boomers" are very concerned about how they will finance their retirement. There have been a lot of stories in the news lately about Canadians 50-plus considering using home equity as a vehicle to fund retirement. I thought I would take this opportunity to highlight a mortgage product called a Reverse Mortgage. Now, let me say this right away, a reverse mortgage is not for everyone, however there are some situations where it can be a great fit.
What is a Reverse Mortgage?
In Canada, reverse mortgages are available through CHIP - the Canadian Home Income Plan, where homeowners age 55+ are able to access up to 50% of the equity in their home (depending on age) without income or credit qualification. Unlike a traditional mortgage, there are no monthly payments with a reverse mortgage, rather the principal outstanding balance on the mortgage grows as the interest accumulates. The balance of the mortgage is not due and payable until the property is sold.
Pros and Cons of a Reverse Mortgage
Plain and simple, a reverse mortgage costs more than a standard mortgage. Current rates on a 5 yr reverse mortgage are at 5.45% (as of todays date) where our fully qualified mortgage rates are just below 3%. However with a reverse mortgage the only real qualification is done on the valuation of the property. As long as there is equity in the property and it is in good repair, there should be no problem getting financing. Here are a couple scenarios where a reverse mortgage makes sense.
A reverse mortgage is a great financial tool that allows seniors 55+ to easily access home equity to help cash flow - without selling the family home!
Keeping the Family Home
My Father worked over 30 years on the railroad and recently retired with a decent full pension. My parents own a property and have the bills to go with it, they are used to a certain lifestyle but don't live extravagantly. If my dad passes away, his pension will get cut in half and unfortunately my mom will be left paying all the same bills with half the income. Knowing my mom, It will be important for her to keep the house so the grandkids can come over after church! This is where a reverse mortgage can become a great option. Based solely on her age and the property value, she would be able to access some of the equity from her home to help pay her bills so she can stay where she is. For my mom, a reverse mortgage is the solution for keeping the house and provides an option where otherwise one wouldn't exist.
The Living Inheritance
A couple years ago I was working with a young family who was having a really hard time securing financing on a property, I won't go into too much detail, but they were in a really tough spot. Their parents wanted to help, but just didn't have the income to support co-signing on the application. After working through all other options, the retired parents mentioned that they owned their property clear title. We successfully arranged a reverse mortgage on the "family home" to access the funds to purchase a property for the young family. Basically the parents considered this a "living inheritance", although it cost more than a traditional mortgage, they were able to help out their kid.
Horizon Equity is a division of First Foundation. We are fully licensed mortgage professionals able to offer reverse mortgages through the Canadian Home Income Plan. if you think a reverse mortgage could be a solution to your parents cash flow problems, please direct them to homereversemortgages.ca or have them contact us anytime at 1-866-578-0980, you can be sure that we will take care of them.
At Horizon Equity, we believe that retirement is a special time of life, it should be enjoyed and not burdened with money worries!
We understand that a reverse mortgage isn't for everyone, our goal is to provide you and your family with financial solutions and options you might not have known existed. Here is a list of some other great resources to help you learn more about reverse mortgages, including some news articles, a recent survey and some pages from Horizon Equity.