When you take into consideration life events such as: an expanding family, a divorce, a spousal death, education costs, or job changes, most of us will spend our lives paying a mortgage on a home or condo. Sometimes, it will be a number of different homes, depending on the amount of times we move. But realistically, how many of us will actually pay it off in our lifetime. What we will end up doing is paying a lot of interest. Which is why you need to change the way you look at a mortgage.
Yes, part of the mortgage payments you make go toward interest, but part of it goes toward paying off the bank loan for your house - in other words it builds equity in your home. And that belongs to you. If you are 55 years or older, there is a way to make your mortgage work for you and not against you. It's called a Reverse Mortgage and it will give you financial freedom that you didn’t realize was available to you. This type of mortgage allows you to have no mortgage payments on your home until either your death, you sell the home or you want to discontinue the Reverse Mortgage. There are a few key requirements:
* You must be 55 years or older
* There needs to be equity in your home
* You must own your home
* It must be a principal residence, it cannot be a secondary or income property
If you are close to your retirement dreams (or mom and dad are), it can be frustrating when it doesn’t look like you’ll be able to retire comfortably or may have to continue working past retirement age. For many of us, the bulk of our money is tied up in our home, debt, children and life in general. And despite what we've been taught, paying off our home is not necessarily a good thing.
Most people would like to have a lot more income, whether it's to help their children/grandchildren with a home or education; renovations for their own home or modifications (for seniors) as well as to deal with outstanding debt. The money from your Reverse Mortgage can be used for all of these things. For example, if you own a home worth $300 000 and you have a $200 000 mortgage, that's $100 000 in equity. You can access that money and use it for whatever you would like. It's tax free – that’s right, there are no taxes paid on that money. You're probably wondering about interest - since nothing in life is completely free - except smiles. There is 5% interest on the loan or you can opt for a variable rate, which is paid at the end of the three options mentioned earlier: death, sale of property or termination of the Reverse Mortgage agreement.
Home Equity oversees Reverse Mortgages in Canada and that's where your bank mortgage is transferred. Any time you want to go back to a big bank mortgage, you can.
Keep in mind, in the time that you still have a mortgage, your home is still going up in value. A conservative number used by the banks is 4 to 5% per year. Depending on your will (and that's another article for the future), your family or trustee will have to replace the mortgage when you die - either by selling the house or transferring ownership.
You should always use the equity in your home to do good things with it. Make your home work for you. Don't look at your home as ownership, but as a financial tool that works for you and your lifestyle. The goal is not to pay off your mortgage, but to have the money enhance your life and give you peace of mind.
Have you heard of a reverse mortgage before? Let us know you think in the comments.
Ian Webster's nearly two decades of recognized experience at several well-known financial organizations has given him the inside track on the upsell of products such as mortgages and mutual funds and allowed him to help clients with everything from lowering their taxes to developing profitable investment portfolios. His expertise has been featured in The Globe and Mail, Toronto Star, Toronto Sun, and Time. He has also been a featured financial speaker at many high-profile networking functions.