Stop the insanity!
To those Canadians who are “house rich and cash poor” their home is now their retirement lifeline.
The family home that they have diligently paid the mortgage off on must now go on the auction block. They must sell the family home to get cash. They will downsize and bank or invest the difference. The “difference” is the money that must fund their “golden retirement” years. And they are hoping that the money is enough.
Sound like fun?
This is a house that they called home for 30 or more years. They like the neighborhood, they like and know all their neighbors. There is a lifetime of fond memories tied up in the home. What a shame to sell…
Yet this is what happens when you pay off your mortgage faster the wrong way – a reverse mortgage may be your future!
A reverse mortgage is a strategy of pulling equity out of your home by way of a loan. It is not necessary to pay on this loan, however, interest is calculated at market rates and allowed to accrue – increasing the loan amount outstanding each and every year until the home is sold!
How do you like this idea so far?
A reverse mortgage is available to Canadians living in large urban centers that are “serviced” by the promoter’s of this program. They must own their own home and be age 60 or older.
The specific amount that can be obtained with this program is 10% to 40% of the current appraised value of your home, based on your age and that of your spouse, and the location and type of home you have.
You receive the money tax-free. (I should hope so! After all, it is your many years of after tax mortgage payments money to begin with.) And may spend it in any way you wish. (Wow, isn’t that big of them.) No payments are required while you or your spouse live in your home. The full amount only becomes due when your home is sold, or if you move out.
If your heirs want to keep your home, they can repay the amount of the reverse mortgage loan from other funds. (Now how many kids would have this like of money?)
Read on – it gets even better.
Living in Vancouver, let’s take a standard example of your home being worth over 1 million dollars at retirement – when you reach age 60. OK?
Would you look at those numbers!
What do they mean
Well, based on the information at Canadian Home Income Plan the maximum loan on your clear title home worth $1.3 million is $261,097!
The interest rates on the loan default to what you see – in the neighborhood of 8.30% and 7.60%. (Certainly higher than current mortgage rates.) To keep consistent, I plugged in a 6% growth rate for your home and we see the results of this strategy.
In year one, $22,000 of interest is being ADDED to the reverse mortgage loan outstanding and escalating to $42,000 in year 9. After that, it’s anyone’s guess because the calculator just shows year 15 and then year 20.
Bottom line analysis at year 20 when you are age 80 is that you are enjoying retirement in a home valued at $4,169,276.
However, you may become a little squeamish when you think that the loan against your home has ballooned to $1,223,637.
But hey, if the kids really want the family home when you pass they can collectively pony up $1.2 million to pay off the loan.
Otherwise, your estate will sell the home for its appraised value of $4.1 million and leave $2.9 million in the estate for the kids to squabble over.
Sound like a plan?
If this excites you and if you or someone you know is interested in “unlocking” the value in your home and “enjoying life on your terms”, well….here’s that Web Site again. Canadian Home Income Plan
To many Canadians accepting a reverse mortgage in retirement is the only financial option left to them!
In my opinion, this is a true shame…
Again, I am not disputing the fact, that a home is an important pillar of the wealth creation process.
Unfortunately, it’s the ONLY pillar in many Canadian households.
Remember, the rules of investing hold even truer today than ever.
Don’t put all your eggs into one basket. Wouldn’t you rather be 50% right than 100% wrong?
You still need a balanced and well-planned approach to saving and accumulating wealth for your other goals in life. And money – or the quick access to money via RRSPs and non registered investment portfolios will be what funds your goals and retirement lifestyle.