House rich, cash poor

Reverse mortgages can be an income boon in retirement, but not for everyone

You’ve likely noticed there’s been a fair amount of conversation in the business media these days about how millennials can’t afford to buy a house because of their avocado toast addictions.

But it turns out there’s a considerable portion of the baby boomer generation that won’t be able to afford the hipster delicacy.

A recent poll conducted by CIBC revealed almost a third of Canadian retirees and those approaching retirement have little to nothing saved for their golden years. In fact, almost 50 per cent have only tucked away $250,000 or less.

But since the vast majority of baby boomers are homeowners, their net values are usually significantly higher. It’s a case of being house rich and cash poor.

For those individuals, there are options beyond getting a job as a department store greeter to make up for the monthly income shortfalls; but like anything, they come at a cost.

Refinancing is the simplest route and tends to provide the best interest rates, and home equity lines of credit give you the flexibility to draw down as much or as little as you need – up to 65 per cent of your home’s value – with minimum monthly payments.

In recent years, reverse mortgages have become an increasingly popular option. They allow the homeowner to borrow up to 55 per cent of the home’s equity and receive payments, either in a lump sum or at regular intervals, all while you continue to live in your home.

Did I mention it’s entirely taxfree and it doesn’t affect your oldage security payments?

Because the banks offering them charge about double the interest rate of a traditional fixedrate mortgage, many financial planners suggest only using a reverse mortgage as a last resort.

That said, if you retire from a job and aren’t receiving a bunch of government benefits, but you’re sitting on a house worth a couple of millions dollars… it might make sense.

Reverse mortgages are only available to Canadians 55 and older, and the age requirement applies to both you and your spouse.

The rate and availability of a mortgage is going to depend on the equity you’ve built in the home, it’s appraised value, current

interest rates and where you live, as homes in urban centres generally have a higher value.

The beauty and appeal of a reverse mortgage is that you don’t have to make regular payments, but you have the option to repay, in full, at any time.

Just keep in mind you’re paying some pretty steep interest until the loan is paid, thus increasing the loan amount as time goes on.

Remember, until it’s paid off, your equity in the house is decreased, so if you have to sell your home, you’re losing that off the top right away. If you pass away, your estate has to pay off the loan.

Other financial drawbacks to a reverse mortgage include the home appraisal fee, closing fee, a sneaky prepayment penalty if you sell or move out within three years of being approved, and, if necessary, fees for legal advice, which comes highly recommended by the Canada Mortgage and Housing Corporation.

Then there’s the matter of your estate and what’s left behind for family and relatives. In most cases, the home is the biggest financial asset, so decreasing your equity will leave less for the kids.