Financing Your Future

By Kevin McKay

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Oscar Wilde wrote, “When I was young I thought that money was the most important thing in life; now that I am old I know that it is.” While many would agree this is a slightly cynical view of the value of money, no one can argue the importance of money to seniors living out their golden years. And like most things in life, the amount of money people have or need varies widely from person to person. While there are people on both ends of the wealth continuum, practical options exist for seniors looking to free up some cash flow.

One of the methods seniors can access funds is to take out a reverse mortgage. And while almost everyone has heard the term, not everyone understands what a reverse mortgage is, or how it works. David Chen, owner and chief financial advisor of DC Complete Financial Services Inc. says, “In simple terms, a reverse home mortgage is a collateral loan against your principle residence, which allows the home owner to access the locked up value or equity of the home and convert it to cash without selling the property.”

People wishing to apply for a reverse mortgage need to be at least 55 years of age and many who do apply are much older. Karen Boies is a licensed mortgage planner with Dominion Lending Centre and has been for nearly seven years since leaving a government job she held for 24 years. She says, “I enjoy creating a difference in the lives of the people I help with their finances and, in particular, their mortgages. I truly believe I am making a positive contribution to my clients. A reverse mortgage is like any other encumbrance on a property where we lend the client money at a specific interest rate for a specific term. Rates and terms vary just like a traditional mortgage.”

One of the attractive benefits of a reverse mortgage is that the homeowners can remain in the comfort of their homes. Boies says, “It is a life-term loan against the accumulated equity in a home that requires no repayment while the clients continue to live in their home. The money plus interest is paid back when the homeowner sells their home, permanently moves out or passes away. Because there are no monthly payments, the amount owed grows over time.”

In addition to the obvious advantages of increasing cash flow and remaining in place, there are some other positive aspects to the reverse mortgage. For example, there are no monthly payments unless you choose to make interest payments. Chen lists a few others: “For people without heirs, this is a great way to access some of the value of the home for use in retirement, leaving little to no value in the home by the time of passing thereby allowing the senior more enjoyment of their non-cash assets and leaving less for the tax man. Speaking of taxes, the money is tax free as it is a loan. Finally, it does not impact income-tested government benefits like Old Age Security and Guaranteed Income Supplement.”

If all this sounds too good to be true, be aware that there are also some pitfalls and potential disadvantages to consider before taking the plunge. The most obvious mistake would be to take out a reverse mortgage from a non-qualified lender. Do your homework and make sure to speak to a financial advisor before agreeing to work with any particular lender.

“The disadvantages are that if they choose not to make interest payments then the amount at end of term is more than start of term,” says Boies, “this will lead to a reduced equity position eventually. However, repayment of the loan (principal and interest) is guaranteed not to exceed the fair market value of the home at the time it is sold. In the event the fair market selling price of the home is not enough to repay the loan in full, [Canadian Home Income Plan] CHIP will limit repayment to the amount received from the sale. No other estate assets will be touched. Homeowners can choose to receive the planned advances on a monthly, quarterly, semi-annual or annual basis, however the minimum initial draw must be at least $20,000.”

In fact, depending on the amount of money loaned and the length of time the reverse mortgage is held, most of the value of the home can be consumed so when the house is sold to move the owner into a care facility or following the owners’ passing, there may be little or no value left in the house.

Chen also mentions a few other points for those thinking of taking out a reverse mortgage to consider. “The interest rates are often higher than the banks and the fees to access and start the loan are as high as $2,500 to $5,000 and are taken off of the money loaned to the home owner. Also, if the home is not jointly owned and the owner passes away, forced loan repayment or sale of the property may occur.” This could be a devastating result for the surviving spouse, on top of losing a partner.

Health is another consideration before taking out a reverse mortgage. If the value of your home is likely to be needed for your long-term care, you may not want to go this route.

So, if a reverse mortgage is not right for you, there are a number of other options for gaining access to finances to consider. Chen says, “To access the locked-up value of the home, a home equity line of credit may be a better option or the tried-and-true selling of the home to downsize and buying a smaller home and using the remaining cash to invest or consume during retirement. Both of these do not affect taxation or government benefits as the principle residence is capital gains exempt.”

“If RRSPs or RRIFs exist, consider taking money out to a maximum level that does not seriously increase your tax rate using things like income splitting of RRSPs or RRIFs that have been placed into pension-like investments and/or tax deductible expense or tax credits like disability tax credits transferred to the spouse with the highest income.”

Additional methods for financing your future are also available. In the end, Chen and Boies agree that consulting a financial expert before making a decision is the wisest course of action. Boies says, “Speaking to a financial planner is the best way to find out about planned savings for retirement and what they can expect from the government or pensions.”



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