How to hold your mortgage on a fixed income
When we plan for our “golden years”, most of us envision being care-free, mortgage-free and enjoying retirement in the home where our most cherished memories were made. We picture travel. We picture helping our children purchase homes. We picture blissful mornings watching the sunrise on our porches. What we don’t picture is having to manage mortgage payments, debts and the ever-growing cost of living on a government pension that hardly seems to increase from one year to the next.
In my years as a banker in Stratford where a large portion of my clients were seniors and in my current profession as a Mortgage Agent based out of Wilmot Township, I saw first-hand the stress and hardship that comes with paying a mortgage on a very fixed income. I came to know, very quickly, that over half of all Canadians are carrying debt well into their retirement. 75% of those aged 55 and over in the Kitchener-Waterloo and Cambridge area are homeowners and, among those, the average household debt totals $210 000.00. Monthly mortgage payments can be cumbersome for those on a fixed income, especially if you happen to have a variable rate in the current rising interest rate environment. So what other options are there?
Reverse mortgages offer an equity based borrowing vehicle for homeowners aged 55 and over. They allow borrowers to access up to 55% of the equity in their home without a monthly payment. Clients can choose to take their equity in a lump sum or receive installment payments to subsidize their income. Borrowers retain ownership of their homes, can remain in their homes for as long as they choose and are guaranteed to never owe more than the value of their home. Unlike traditional mortgages, surviving spouses can remain in the home and take over the mortgage without ever having to requalify.
Interest rates on reverse mortgages are modestly higher than those of traditional mortgages, which often gives my clients pause. However, when I ask my clients to consider the stress caused by financial uncertainty and having to pay a mortgage on a fixed pension, for many, concerns about interest rate pale in comparison. Another important factor to consider is that real estate values, on average, have increased at a rate that has far outpaced the rate at which interest accumulates on reverse mortgages; meaning that, more often than not, equity continues to build throughout the life of the mortgage even when payments aren’t being made.
Reverse mortgages have moved away from being simply a needs-based, last-resort product for those wanting relief from monthly payments and has increasingly been seen by financial planners and savvy homeowners as an important piece of their retirement plan. There are now a wide range of reasons that people seek out reverse mortgages from wanting to provide a living inheritance to children to investing to financing world travels (which we can hopefully enjoy again in the not too distant future).
No mortgage product is right for every homeowner and reverse mortgages are no different. It is a niche product with a very specific customer in mind. If your income allows you to pay your mortgage comfortably and still live your life to the fullest, a reverse mortgage may not be the best solution for you. However, if you are one of the growing number of seniors who are navigating a divorce, if your current mortgage payment is leaving you with little money at the end of the month, or if you’re one of an increasing number of Canadians wanting to explore the idea of providing a living inheritance, a reverse mortgage is worth exploring.