Reverse Mortgages and Other Alternatives To Increasing Cash Flow

Reverse Mortgages, Calgary

Would you like to access more tax-free cash flow in retirement? 

The largest asset that you have in retirement is your home, it represents a large chunk of dormant equity. It's like you have this piggy bank, but the money is trapped inside.

How can you access this cash?

Reverse mortgages have been around for over 25 years in Canada. Still, many Canadians do not fully understand them. Are they a good idea? Is it 2 steps backward to go 1 step forward?

How Do Reverse Mortgages Work:

  • You have to own your home outright or have a significant amount of equity in your home
  • You can access the equity in your home - up to 55% of the appraised value
  • You have to be at least 55 years old 
  • The lender will provide you with either a lump sum or monthly/annual loan
  • When you sell your home you have 180 days to pay the loan plus interest back to the lender

The Pros:

  • Allows you to access the equity in your house while still living in your house
  • You don't need income to qualify, just equity in your home
  • Enables you to enjoy your equity while still alive, rather than saving it for someone to inherit later

The Cons:

  • You will pay about 2-3% more than the current interest rates for borrowing.
  • You have to personally pay the appraisal fee ($400 or more).
  • You have to pay an administration fee of between $500-$1500.
  • Legal Fees may be added as well.
  • The lender will embed the fees into the new loan, which means you will be amortizing and paying interest on them for many years.
  • Depending on how long you live, you could owe the entire value of your house back to the lender when you sell it.
  • The lender could force you to sell your house to pay off the loan once you've maxed out the amount you can borrow. This leaves you potentially at the mercy of unfavourable market conditions at the time.
What are some other alternatives to reverse mortgages?

Home Equity Line of Credit 

  • Much lower interest rates
  • Very low set up fee, often the bank will pay for the appraisal
  • Legal work is done by the bank's legal dept at no cost to you
  • You will have to pay monthly interest charges
  • You are always in control of how much you borrow and when you pay it back

Downsize to a smaller house or condo

  • The proceeds of your house sale could be invested and now you can earn interest/dividends rather than paying interest.
  • These investments enable you to increase your wealth whereas a reverse mortgage depletes it. 
  • You no longer have all the worry, labour or expenses associated with homeownership (Taxes, Up-keep, Insurance)
  • The earnings from your investments could pay all or a part of your new mortgage or rental costs

Conclusion

We are not fans of Reverse Mortgages, however, they can be a viable option in some circumstances. We would advise not using this strategy unless you have to, and only after all other options have been considered. We encourage pre-retirees to add a Line of Credit to their home before they retire.

Check out our article titled, "Is it a good idea to tap into your home's equity before you retire?".  As Retirement Income specialists, we prefer the alternatives with the lowest and most efficient long-term cost for generating cash flow.

Feel free to reach out to us with any feedback, questions or if you would like to chat about:

  • Generating guaranteed income from your investments
  • Ensuring you don't outlive your money
  • Strategies for tax-efficient investing 
  • Our RRSP Exit Strategy

Check out our fee-only planning services: Click Here

 

 

 

Retirement Income, Investment & Tax Planning, 

Willis J Langford BA, MA, CFP

Nancy Langford CRS

Hervin Pesa BA, CFP

"Helping you get your total financial house in order so you can retire more confidently with purpose and peace of mind"


Share This Post:

Related Posts

Latest Testimonial

I contacted Langford Financial to see if they could help me with specific questions on retirement & estate planning, efficient tax strategies, CPP and OAS benefits, and income drawdown strategies. I was very nervous at first about whether they would be a good fit for my needs, but my concerns were quickly put to rest and Willis and his team made me feel at ease right from the very first meeting.

They are very easy to work with, are very knowledgeable and resourceful, are able to break down complex matters into an easy-to-understand manner, and are always quick to respond to any questions. They reviewed my situation and were able to tailor a plan to fit my specific needs, to my complete satisfaction.

The plan included amongst other things, the best way to utilize efficient income tax strategies. helped me to understand the correct drawdown of assets which would result in larger savings, and provided guidance on insurance products and efficient estate planning.

As a result, I have a much clearer picture of my financial situation now and feel very confident and satisfied with the plan that they have proposed for me, going forward. What I appreciated the most about Willis and his team was that, in addition to their friendly, personable and professional approach, at no time was there ever any pressure to purchase any products.


I am very happy with the service I received from Willis and his team and would recommend Langford Financial to anyone looking for advice on their retirement planning needs. You will not be disappointed!

Naila Jinnah

Naila Jinnah
Fee-Only Planning Client

Contact Us

Questions? Comments? Call us today at 587-755-0159 or fill out the form below:

Have Questions? Call Us Today At

Call Us

Join Our Newsletter



Subscribe