A reverse mortgage is often assumed to be a reactive option for a senior homeowner in financial need, but it’s not always the case. In fact, there are situations when a reverse mortgage can be used proactively to unlock financial opportunities.
Meet Sheila and Dan
Consider the case of Sheila and Dan, a married couple who both recently turned 70. They live in the Greater Toronto Area in a four-bedroom house that they purchased in the 1980s when their two kids were young. Their house is probably worth around $2.5 million and is mortgage-free.
Despite being multi-millionaires on paper, their other assets are fairly modest. They have $200,000 combined in RRSPs, a small savings account, and are both collecting their CPP and OAS government pensions. They each receive close to the maximum CPP retirement pension, as well as the maximum Old Age Security, which amount to only about $3,500 per month.
They helped their children with down payments on homes in the BC interior, which has significantly depleted their savings. Sheila and Dan’s retirement plan included moving out of the GTA and cashing in on their home equity. However, they are not quite ready to make the move yet, in large part because Dan’s 95-year-old mother is in a nursing home nearby. As a result, they may stay in their home for the next few years to be close to and care for her.
Difficult decisions
Sheila and Dan are now grandparents to four grandkids and would love to spend more time with them. However, the drive from their home to visit their children is at least 5 hours one way. Their kids both have modest detached homes that are great for their young families, but neither is well-suited for Sheila and Dan to spend a night, let alone an extended visit.
Sheila often comments how great it would be to have a house that could accommodate everyone. They could drive there once or twice a month and be able to stay for a few days at a time, as well as host their kids and grandkids for holidays. Over the summer, if the kids were not in camps, they could stay with them for visits as well. In the meantime, their GTA home would be their home base, so they can continue to be close Dan’s ailing mother.
They have done some online research and found 4-bedroom homes for well under $1 million, although many would need renovations. Dan is certain they would not qualify for a mortgage and will not even entertain the conversation. He figures it will have to wait a few more years, but in the meantime, they are missing out on time with their young grandkids. They worry as they get older, they may not want to hang out with their grandparents like they do now.
Dan dreams of getting a small condo in Arizona, where he and Sheila can spend time over the winter and play golf together. He has looked at places online that are selling for around $200,000 US dollars. He feels guilty sharing this dream with Sheila, which would take them even further away from their kids and grandkids for part of the year. Besides, even if they cashed in their RRSPs, they would have well under $200,000 Canadian, so would fall short of what they would need to buy in Arizona.
The Reverse Mortgage Solution
A reverse mortgage for Sheila and Dan may help them balance all of their priorities. It was suggested by a neighbour, and after a bit of research, they got excited about the possibilities.
They can probably borrow up to $875,000 of their $2.5 million home and would not have to make any monthly payments. This would allow them to buy a home in Nelson near their kids. Depending on the purchase price and potential renovations, they may even have enough to buy a condo in Arizona as well.
The challenge for Sheila and Dan might be the increased carrying costs of owning three homes. Besides that, Dan realizes they can probably only go to Arizona for short stints, given their caregiver duties for his mother. They would spend much less renting a couple times a year, compared to the cost of owning in Arizona, unless they rented out the property when they were not using it. They do not want the hassle of being landlords anyway.
Read More
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- Reverse Mortgages and the Affluent Retiree
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- Funding Your Retirement: Reverse Mortgage
They agree their best option might be to buy a house to be closer to their kids and grandkids. Maybe some of the potential renovations could wait until they sell their primary residence, have the cash to do the work, and are there full-time.
Sheila and Dan’s reverse mortgage will accumulate interest for a few years until they sell their home, but it’s a small price to pay to be able to juggle their priorities. In the meantime, they can slowly draw down on their RRSPs to cover the added monthly costs of owning the second home, while keeping their incomes in a relatively low tax bracket.
A reverse mortgage may be the ideal short-term tool for Sheila and Dan, who are millionaires, but cannot access their wealth without selling their home. Although hard to think about, Dan knows his mother is in her final years, so their remaining time in GTA may be is temporary. When they sell their house and move permanently to be closer to the kids, they would pay off the reverse mortgage and any prepayment charge (dependent on when they sell), and by then will have plenty of savings to supplement their spending in their 70s and 80s—including spoiling their grandkids and improving their golf game in Arizona.
A reverse mortgage may not be right for everyone, but it can be a great option for many. So before downsizing, renting, or moving into a retirement home, seniors and their families should consult Allen Ehlert to discuss if a reverse mortgage could be a direction you should consider and which financial institutions offer the best solution for you.
