It's Your Money  

Alternative options to a reverse mortgage

TV ads don't tell full story

It’s no real secret that some Canadians are heading into retirement with far less money in their retirement accounts than they really need. Many of these people figure that the value of their home will be a major player in funding their retirement expenses.

While this may feel like your only option, make sure you think carefully about how you decide to access the equity in your house.

I am sure you have all seen the TV ads announcing how wonderful a reverse mortgage is. These commercials go on to tell you that there is no downside (so why wait!) to enjoy tapping into some of the equity value built up in your home.

Here’s how it works: If you are a Canadian homeowner older than 55, you can get up to 50 per cent of your home’s value pulled out as cash. You are not required to make any payments against this loan and you don’t have to re-pay the loan amount or interest until you sell your home or pass away.

Here’s the problem: Firstly, the rates are high, averaging at least two or three per cent higher than other similar mortgage products. In addition to the high rates, there are generally expensive start-up fees as well.

It’s also important to remember that we’re in a period of all-time-low interest rates and the maximum you can lock the rate in is for five years. When you need to renew, you could be facing a much higher rate at that time and you would have no way to unwind the situation you are in. If you were to take out a $250,000 reverse mortgage today, your loan balance could double in as little as six or seven years leaving little equity left in your home.

The good news is that there are several viable alternatives to a reverse mortgage and most of the time they will make far more sense to use:

Home Equity Line of Credit – A HELOC is similar to a reverse mortgage in many ways but generally has much more competitive interest rates. With this option, you have the ability to pull out money as needed up to an agreed upon percentage of the home’s value and interest is calculated on the outstanding balance.

Refinance Your Home – If your house is now mortgage free but you want to access some of the equity, you might consider re-instating a traditional mortgage as well. Unlike a HELOC, the interest rate can be fixed for a longer period of time which can provide certainty in managing your budget.

Sell Your Home – While this option doesn’t allow you to stay in your existing home, it does give you real access to 100 per cent of the equity built up and it does so without taking on any new debt. Many people have emotional attachments to the place that they’ve lived for many years, but this option should be considered.

You may opt to purchase a smaller, less expensive home and can then use the balance of the sale proceeds to live on. Alternatively, you might opt to purchase an annuity with the full sale amount and use part of your guaranteed income stream to rent a home instead.

Whatever option you select, be sure to take the time to choose carefully. There are a few positives to the reverse mortgage program – payments are tax free (OAS won’t be affected) and the amount you owe can never exceed the value of your property – but the decision to enter into this arrangement is one not easily reversed.

Before you decide to take a reverse mortgage on, sit down with a Certified Financial Planner (CFP) professional who can help explain the pros and cons of each option in detail so that you can properly decide what’s right for you.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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