I’ll be the first to say it – a reverse mortgage is not the answer for everyone who needs quick cash. But in some cases, a reverse mortgage can meet a unique need, and then I’m happy to propose it as an option for members who find themselves in a financial fix. Like Roger and Wanda (not their real names).
A few months ago, Roger and Wanda called me because they came up against a financial obstacle.
The couple, both in their late 70s, are energetic, good-natured, and avid local minor hockey fundraising supporters. Roger and Wanda love living in Lake Country, Wanda is renowned for her green thumb, and Roger tries his best to keep up shooting hoops with his grandkids when they come to visit. They manage well, covering monthly bills with their pension and Registered Retirement Income Fund (RRIF) income.
2017 will mark Roger and Wanda’s 50th wedding anniversary, and both their sons have promised to come back to Lake Country to visit. Their eldest son David has Multiple Sclerosis that moved him to a wheelchair earlier this year. It’s been a real struggle for David, his wife Sandra and their three children. Roger and Wanda want to welcome both sons and their families into their home for an extended visit, to enjoy each other’s company and celebrate the golden anniversary together.
Accommodating the house for David’s wheelchair would make a huge difference to the family’s peace of mind and ability to prolong their stay. There are a few renovations that would make daily living easier for Roger and Wanda as well, like an upstairs bathroom renovation, connecting the house to the garage with a spacious (and wheel-chair accessible) mud room/laundry room, and rebuilding the stairs, and adding a ramp, from the back deck to the back yard.
On their fixed income, however, these renovations are more than Roger and Wanda can afford. They own their house outright and plan to stay in it as long as they can, but feel they can’t access its value unless they sell it – which defeats the purpose of the renovations. Like many Canadian seniors, much of their net worth is locked up in the value of their home.
As their financial partner, I feel strongly that Roger and Wanda should not run up expensive credit card debt as a way of financing these home improvements. I already know that their fixed income won’t make a generous personal loan possible. And their meticulous money management still doesn’t leave room for new, monthly loan repayments.
So I explained to Roger and Wanda how a Reverse Mortgage works.
A Reverse Mortgage lets you borrow up to 55% of the appraised value of your home. Typically, you don’t have to make any loan or interest payments (although you can). The repayment amount builds until you’re ready to sell, or ultimately gets paid from your estate.
You continue to hold ownership and title of your home. You and/or your spouse can stay in your home, continue to pay your property taxes and home insurance and keep your property well-maintained.
Whether you wish to receive your money in regular installments or in one lump sum, the choice is yours. You can also decide, at any point, to repay the principal and interest in full or switch to paying interest on an annual or monthly basis (there may be fees and/or a penalty depending on your timing).
We worked out that we could access 28% of Wanda and Roger’s home equity for renovations and deposits they needed for their catered celebration. There was no pressure to start making loan payments immediately, and, by drawing less than the full lending limit, Roger and Wanda have the option to get at additional capital if they need to in the future.
Income from a reverse mortgage comes tax-free. It does not affect Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.
Roger and Wanda understood that, with a reverse mortgage, their equity in their home would decrease with accumulating interest, which impacts the value of their overall estate for their heirs. We reviewed fees, which included home appraisal and legal fees. Then I left Roger and Wanda to talk it through.
What did Roger and Wanda decide?
For Roger and Wanda, this important family gathering holds more value to them than an extra $100,000 to dispense through their will. The renovations will allow their disabled son to visit much more comfortably (and, so they hope, more often!) and will help them stay in their house longer so they can continue to make memories in their family home.
We’d love to answer any questions you have about reverse mortgages and discuss if this kind of loan is right for you. Get in touch with us. We’d be happy to help.