Have you thought about the idea of remaining in your home, getting some cash out of the equity to enhance your lifestyle needs, and not having to make any payments on the loan or repay the loan until your surviving spouse dies? If you or your parents are 62 years of age or older, this is an option you may wish to explore. The concept is referred to as a “reverse mortgage”.
Reverse mortgages are becoming more popular, and are available to many people across Canada, particularly in the major cities. Many retirees have built up considerable equity in their homes, and may prefer to turn their largest asset into immediate cash and/or ongoing revenue and still remain in the home. People frequently prefer to remain in their own home, because it is in an established and familiar neighborhood, or close to family and friends. At the same time, they may also need cash or additional monthly income to meet personal needs such as travel, renovations, a new car or helping their children, but they don’t want to make monthly loan payments or pay tax on additional income.
The basic concept behind a reverse mortgage is simple. You take out a mortgage on part of the equity of your home, and in exchange, receive a lump sum of money and/or a monthly income for a fixed period or for life. If you are married, this would be for the life of the surviving spouse. This latter example is sometimes referred to as a “reverse annuity mortgage” or RAM, as part of the money obtained from the mortgage is used to purchase an annuity.
When you die (or if you are married, when your surviving spouse dies), the mortgage plus accrued interest must be repaid. You do not have to make any payments in the meantime. If there is any balance left in terms of residual equity in the home after the sale, it would belong to the senior’s estate. If there is a shortfall, you want to make sure the company absorbs that loss, not your estate.
Make sure that the reverse mortgage company has obtained an opinion from Revenue Canada that the lump sum payment and monthly annuity payments are tax-free, as long as you live in your home. You want to be assured in writing that the current ruling on the various means-tested programs, such as the federal Guaranteed Income Supplement (GIS), is that receiving the annuity will not interfere with your eligibility for, or reduction in, the GIS.
Since you still retain home ownership, you benefit from any appreciation in value of the home over time–that is, you get an increase in equity. For example, if your property goes up 10 per cent a year in value, and you locked in the mortgage on your property for the reverse mortgage or RAM at eight per cent, then you are technically ahead in terms of the interest differential.
In reality, however, because you are not making regular payments on your mortgage, the accumulating interest is being compounded, eroding away from the increasing equity. The reduction could be offset substantially by an attractive average annual appreciation in property value. Conversely, a low or zero property appreciation could result in the equity being eroded away rather quickly.
The good news, given today’s low-interest environment, is that you are paying less interest on the money that you are borrowing. The bad news is that if you obtain an annuity, you are receiving less return on that annuity investment. There are variables between reverse mortgages and RAMs on the issue of interest rates and other specific conditions.
Here are some points to consider and questions to ask:
What are the age requirements for the lump sum or annuity plan?
Do you need to have clear title on your home?
Can you transfer the mortgage to another property if you move? Are there any tax or financial issues involved?
What percentage of your home equity is used to determine the reverse mortgage or RAM, and what percentage of that is available for a lump sum payment and annuity?
Is the interest rate on the mortgage fixed for the duration of the annuity, or is it adjusted? And if adjusted, how regularly, and using what criteria?
If the reverse mortgage and lump sum are for a fixed term, what are the various terms available (l5, 20, 25 years)?
What if both spouses pass away unexpectedly just after the annuity begins?
What if the equity of the home (sold after the death of the surviving spouse) is insufficient to pay the mortgage and accrued interest? Is the estate liable for the shortfall?
Can you move out of the house, rent it, and still maintain the reverse mortgage plan? What are the tax implications, if any, of this option?
If the annuity is for life, is there a minimum guaranteed period of payment or will payments stop immediately upon the death of the holder and/or the death of the surviving spouse?
How will the income received under the proposed plan be taxed?
Will the income received affect your eligibility under any federal or provincial housing or social programs?
How will your children feel about the fact that the equity in your house could be substantially or completely eroded as an asset of the estate?
You can find out more about reverse mortgages by referring to the Yellow Pages, under “financial planners” or “mortgages”, or do a Google search online. The process of obtaining a reverse mortgage or RAM takes about four to six weeks on average, including the home appraisal, annuity calculations and other matters. As mentioned, the complexity of these plans makes it essential for you to obtain independent legal and tax advice in advance, and thoroughly compare the features and benefits to determine if this concept or other alternatives, such as renting out a basement suite or cashing out and downsizing to a condo, are more appropriate for your needs.
