Many Canadians embarking on retirement aren't financially ready.
In fact, the retirement shortfall may be as high as $430,000 according to a BMO study released in August 2013. Many baby boomers, or those born between 1945 and 1964, will not have all the money they require to sustain them in retirement and are choosing to remain in the workforce longer than planned. Some will choose to work part-time, sell off collectibles or rent their homes to get supplementary income according to BMO's research. Almost one third even expect to sell their homes.
But another choice continues to emerge for retiring Canadians that takes advantage of a home's equity: reverse mortgages.
Reverse mortgages allow seniors to borrow against the equity they've acquired in their homes. But rather than writing a cheque to the lender each month, the reverse scenario occurs in that the borrower receives the payment and never has to pay installments if they choose. What's more is that only age, (55 and above) the location and type of home you have, and your home's current appraised value are the factors that determine if you qualify, not your credit rating or level of income.
HomEquity Bank is currently the only national provider of reverse mortgages to Canadian seniors, which it has administered under the Canadian Home Income Plan (CHIP) since 1986. HomEquity Bank has more than $1.5-billion in reverse mortgages outstanding and expects to gain more than 2,500 new customers in the coming year, as noted in a Globe and Mail report.
On the average, about 33 percent of a home's equity is paid out in either monthly installment or lump sum payments, but up to 50 percent of the home's value can be lent out according to HomEquity. Basically, no interest or principal payments are required until the home is sold or the client passes away. At such time, the principal balance of the loan plus accrued interest and any associated finance charges will be due. However, clients never have to pay more than the home is worth.
The reverse mortgage is by no means risk-free. The interest rate tends to be higher than the market norm, and of course, rates are expected to go higher in the next few years meaning seniors on fixed incomes have to be extremely cautious. As such, a financial planner should be consulted before undertaking such agreements.
For those who lack sufficient funds or cash flow in retirement, but hold significant equity in their home, many advisors still recommend that retirees sell their property, downsize living arrangements and place the remaining funds in annuities or other suitable investments.