Ask advisors whether the money tied up in your home should be counted as an asset that you can tap in retirement and you’ll get a wide variety of opinions.
Most financial planning software programs don't consider home equity when tallying potential retirement income. In looking at the few that do, it's clear that there's no agreed-upon method for calculating its impact on your financial future.
Despite this, home equity remains a tempting target for older investors to tap. Don’t forget that close to three-quarters of Canadians over age 60 are homeowners, not renters — a considerably higher rate than for most other age groups.
You can always downsize, of course, and invest the difference. But, other than that, there really aren’t a lot of options when it comes to wringing money out of your home.
Helocs Not Generally Available
A home equity line of credit secured against the value of your property is likely your best bet. But these are typically less useful for many older homeowners since they often have a harder time qualifying unless they already have some regular income.
That's why a growing number of baby boomers exiting the workforce, or in the midst of a ‘grey’ divorce, are looking to mine the value of their homes through a reverse mortgage.
A reverse mortgage allows you to borrow from your home's equity while not having to make any monthly payments. Unlike most mortgages, there’s no credit check, no income confirmation, and no insurance requirement. Approval is based only on your age and home equity.
Another major attraction is that the payments you receive aren't considered taxable income and thus won't affect any government retirement benefits.
Qualify As Young As Age 55
All this anticipated demand has prompted HomEquity Bank, the country’s sole provider of reverse mortgages, to recently lower the minimum age threshold for its CHIP Home Income Plan from 60 to 55.
But, before you rush in, understand this: The amount you owe increases over time, while the amount of equity in your home likely decreases. What’s worse, the younger you are, the more the compound interest will grow, and the more you will owe.
And there are a few upfront fees to consider as well.
Watch For Additional Costs
First, you’ll need a home appraisal which will cost $200 to $400, depending on location. On top of that, lawyer’s fees, required by law on all reverse mortgage transactions, can range from $300 to $600.
The third setup cost is closing and administrative fees, which amount to $1495 — a charge HomEquity has waived during past promotions, at least for buyers willing to lock in for a three or five-year term.
But, even then, this is still an expensive option. Right now, for instance, HomEquity is charging 4.75% on a variable-rate mortgage which is 1.75 percentage points above prime. Five-year terms are available at 5.69%. That compares with rates as low as 3.19% for conventional five-year mortgages.
Debt Doubles Every 11 Years
Going this route means that your debt level is going to double about almost every 11 years at today's interest rates, all the while eroding the value of your estate.
But older Canadians are definitely buying, largely because they’ve seen the rates on their fixed-income savings fall significantly while their houses have at least maintained their value or better.
In a world where people are living longer and spending more, the attraction is obvious. Still, tread carefully before you sign up.