Many senior retirees face a financial dilemma: they have a growing need for cash to fund such desires as travel, home repairs, and assistance for their children or grandchildren or just to meet their daily expenses. They’ve discovered that their pensions, CPP and Old Age Security payments are just not enough.

Perhaps one of the couple has suffered from an illness such as a stroke, or advancing dementia, or has to move into an assisted living facility. But what if the remaining spouse wants to stay in their home? How does a couple manage to pay for a retirement home and at the same time maintain the family home?

Perhaps, one of the couple has died. The survivor wants to stay in the home, but has lost the Old Age Pension of his/her partner. With the death of a spouse or partner, a reduction in pension for the survivor may follow. Household costs remain high but the income is now reduced.

Many seniors want to remain in their own homes as long as they can.

It’s the home they may have raised their children in and it’s familiar territory. They know the neighbors and the neighbors know them. But if the senior can no longer cover the costs, or even if they just want to do that “once in a lifetime cruise”, what are the choices available to them?

A choice made by many seniors is to leverage the equity built up on their homes by:

Sell the home:

While this is not exactly “leveraging” the home, selling a home which may have become too big, or too expensive to handle, and moving into a smaller home (bought or rented), is a frequent choice. The proceeds of the sale are not subject to capital gains tax.

Mortgaging the Home:

If they qualify, a senior could mortgage the home. This provides cash for whatever the senior requires, but regular payments with interest will have to be made.

Seniors may find it more difficult to mortgage insofar as they must demonstrate that they have sufficient revenue to meet their continuing payments.

Renting the Home:

Some seniors will move on and rent their home to others. They maintain ownership and create additional income from rent with which they could fund their lifestyle (or even a new home for themselves)

It is possible to rent the home, and at the same time mortgage it for additional cash needs. It is the homeowner who has the ability to mortgage, not the tenant.

Reverse-Income Mortgages:

Reverse mortgages are a relatively new development. They are generally available only to seniors who own their home outright.

The “reverse” in reserve mortgages means that, unlike traditional mortgages, no regular payments are required. The senior receives a cash advance – usually not exceeding 40% of the value of the home (equity), which he or she can use for any purpose. It is tax-free.

Instead of regular payments, interest on the amount(s) advanced is accumulated on the amount loaned until it is repaid.

The mortgage becomes payable when the home is sold, or the owners die.

The Advantage:

The attractiveness of a reverse income mortgage is the fact that no regular payments are required, unlike a traditional mortgage.

Seniors have additional funds to use, and can stay in their own home. However, taxes and insurance still must be paid.

Disadvantages:

Reverse income mortgages are subject to higher interest rates than traditional mortgages – sometimes twice the rate.

Unlike traditional mortgages where the debt decreases with payments, the reverse mortgage debt increases over time.

There may be significantly higher fees associated with arranging a reverse mortgage, and any outstanding mortgage will have to be paid off using the proceeds of the reverse mortgage. Taxes and insurance must continue to be paid, as with any other type of mortgage.

Conclusion:

Whatever the retiring senior chooses to do, it is important to consult his or her respective financial advisor and legal counsel.

A person’s home is his or her castle, more often than not, his or her most important and valuable asset. A decision to use its equity to fund retirement plans should be made only after careful consideration of the options available.

Douglas J. Green

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