Using your home as your retirement supplement – Part 2

BY FAZAAD BACCHUS

Last issue we talked about using your home as a source of income by applying the principle of a reverse mortgage. This will work well for many who do not need to bequeath their home to beneficiaries but it does not look like such an attractive deal for those on the opposite end of the spectrum, especially if this is a family home. This places the retiree in a predicament where there is value in the home but it cannot be accessed.

So, if you have a home and you are heading into retirement what other choices do you have? Well one of the things you could do if take a line of credit against the home, however this works almost similar to a reverse mortgage, in the end there is a loan to be repaid. The loan builds interest and if the property loses value, there would be great losses. Over time, the value of the loan could grow equal to the value of the home and if it surpasses it, the bank could call the loan.

There is an option that can be reached but with careful planning. It requires reaching out for the help of a financial advisor. The strategy is that you can apply for a reverse mortgage but you have to model what the interest amount will build up to. The interest build up will be weighed against the possible gains from the property and there is likely a net effect. This means that the growth in the property should compensate for the interest build up. Still all the same the property has to be liquidated at the time of death so that the loan can be repaid.

Your option in this case after calculating how much you are likely to owe the bank, is to purchase a permanent life insurance policy which is guaranteed to pay upon death, thereby offsetting the loan balance at the bank. The bank will now hold your policy as well for security. When you die, they will receive their payment first. In this way, you can use the value in your home and your beneficiaries will receive the property with the loan already paid off by your insurance coverage. The insurance policy however is something that you have to qualify for and getting it is subject to passing a medical.

Another method you can use, depending on the size and state of repair of your house is to rent it out while you rent a smaller or a downsized apartment. The rent received from the rental property will pay the taxes and insurance and any excess will now pay for your rented apartment. This way you can keep the house for your beneficiaries and still have a place in which to live. You may need to seek out a real estate person to assist you with finding you a reliable renter. All the same, consult your financial advisor on what your best options are.