Using a reverse mortgage to supplement your retirement

BY FAZAAD BACCHUS

Like most people, are you wondering if you will run out of money during your retirement years? Well that may not have to happen if you own a home which has significant equity in it. You and your spouse can qualify for a Canadian Home Income Plan or as some are familiar with, the CHIP plan. This is a very well structured plan here in Canada and may be a saving grace for many.

There are qualifying factors of course, one is that you have to be at least 55 years old and you must own your home. This home must be your principal residence where you live at least six months of the year. If you have an existing mortgage on your home, it has to be first paid off by the loan from the reverse mortgage. When you apply, they will consider the value of your home via an appraisal, your age and also where you live. Age is a significant factor because the older you are the more money you can qualify for. It stands to reason that if you are younger then you will be repaying your reverse mortgage after a long duration, building up a lot of interest.

The amount of the reverse loan is given to you as a lump sum or a lump sum up front and then in periodic payments. During your lifetime you are not required to make any repayments, but the interest on your loan accrues and at the time of your death or should you sell the house, the loan principal and interest becomes due. If the value of your home grows the same as the interest rate on the loan, then you might be lucky in that the value of the home pays the loan in full.

Is it a good decision to enter into a reverse mortgage to supplement your retirement income? Well certainly if you don’t have sufficient income this may be your only resolution, but before you take the plunge, there some factors you should consider. Reverse mortgages tend to have higher interest rates than do conventional mortgages. There is also a set up fee, closing cost fees and often an early repayment fee. These are no different from setting up a traditional mortgage, but they cannot be overlooked.

On the other hand there are benefits to having a reverse mortgage; you make no repayments during your lifetime. All the income is considered tax free income, and it does not affect any of your social insurance benefits like OAS or GIS. You can apply jointly with your spouse and no repayments are expected until the last one of you was to pass away. So in consideration of a reverse mortgage one of the main factors is “do I need to leave money for anyone?” If the answer is yes, then it’s better to seek some advice from a financial ddvisor before you make that final decision.