A recent survey by Manulife revealed that one in five Canadians plan to use their home equity to finance their retirement. Ten per cent were considering borrowing against the equity in their home, while eight per cent were considering downsizing.
Reverse mortgages are a viable option
Opponents of reverse mortgages argue that they are an issue because the interest compounds and they are more expensive than a traditional mortgage. While both are true, the rates aren’t that much higher than a traditional mortgage (prime plus 1.25 per cent at time of publication) and interest still compounds with a traditional mortgage. In addition, you have to make monthly payments on a traditional mortgage or home equity line of credit, where a CHIP Home Equity loan doesn’t require repayment until the home is sold.
Property values consistently rise over decades
Another argument against reverse mortgages is that when interest rates begin to rise again, property values will fall. While this may be true in the short term, those looking at taking out a reverse mortgage at the beginning of their retirement will probably see a minor market correction on property values, but nothing that will adversely affect the home’s value. As a reference, the average annual rate of return on Canadian real estate between 1980 and 2012 was 2.1 per cent. This period includes a few real estate bubbles and many market corrections – and there was still a positive return. Add to this that you are locking in a reverse mortgage at historically low rates which can’t be renegotiated, and they come out a clear winner.
One of the protections that is built into a reverse mortgage is that you never need to repay more than the selling price of your home – and considering that you can only borrow 50 per cent of your home’s equity, this is not likely to be a guarantee that anyone will necessarily need.
A reverse mortgage is cheaper than downsizing
The only “extra” costs of a reverse mortgage are a property appraisal and legal costs – both of which would still be payable if you purchase another home. Add to them the costs of moving, fixing up the new home to meet your standards, potential condominium fees, and the net return of downsizing gets eaten into significantly. If you like where you are living, you may as well stay put and enjoy yourself rather than adding the stress of moving in retirement.
Get professional advice before making your choice
Talk to your financial planner about your options for staying in your home. If you want to make it work, they’ll have strategies to help you. If you want to find out more about reverse mortgages, contact Horizon Equity. Our experts will answer any question you or your financial planner have about the process. Remember that there are many misconceptions swirling around reverse mortgages; if a professional advises you against them for a specific reason, contact us to find out if it is correct.