A reverse mortgage can be a great way to replace income during retirement, or help pay bills when a pension or savings isn’t enough – the money from the reverse mortgage can be used for any purpose: to repair a home, to pay for in-home care, to deal with an emergency, or simply to cover day-to-day expenses.
But there are many other ways a reverse mortgage can be put to use, whether for support or enjoying retirement, that we often get asked about by our clients.
Firstly, What Exactly Is A Reverse Mortgage?
It’s important to understand what exactly a reverse mortgage is before proceeding – to see what options are available, such as the CHIP reverse mortgage.
Otherwise, we’ve put a list together here to help you think of when a reverse mortgage could be right for your financial needs, and help you understand better what are good ways to use your reverse mortgage.
1. Re-Model Your Home
(To Accommodate Aging Barriers)
We have heard first-hand from clients who have wanted to remain in their homes, yet are facing the tough challenge of mobility issues and encountering barriers in their current homes.
Renovations to remove and accommodate such barriers can be costly, and often are something that retirees cannot afford on their savings and/or pension.
Often, people don’t think about such cases as they plan for retirement, so when the situation arrives, they are financially stretched to reach this goal, and face the risk of having to leave their homes when they don’t want to.
A reverse mortgage can come to the rescue in such times and allow aging retirees to make the accommodations they need to stay in their homes.
2. Keep An Emergency Cash Fund Available
Similar to re-modeling for aging restrictions, people don’t tend to plan for health emergencies as they age.
Having a reverse mortgage set up as a line of credit can allow you to access the funds anytime should such an emergency or surprise come up. This means that you will already be ready and won’t have to even worry about setting up your finances to deal with an emergency.
And just like a conventional line of credit, you don’t pay interest on any amount you don’t take out, so you can have the money on standby at no charge – just a really good fall-back in case of emergency.
However, unlike a conventional line of credit, you don’t have to put your house on the line or go through strict qualifications that retirees often don’t meet (income, lending history, etc).
For more information on this, see our prior article on the differences between a Reverse Mortgage vs Home Equity Line Of Credit.
3. Hold Onto Assets And Cover
Monthly Expenses (Including Investments)
Should you have investments in various assets during your retirement and you wish to continue to hold onto them and not face the possibility of having to sell them off should you need the income, a reverse mortgage will give you the chance to cover their monthly expenses and continue to hold onto your investment as their value continues to grow.
With a reverse mortgage, factoring in your interest rate, you don’t have to sell your assets to make ends meet – instead, use the equity in your home to continue your investment.
And the interest on the reverse mortgage would then become tax deductible under a a financial structure that is referred to as the Smith Manoeovre.
4. Pay For Children/Grandchildren Education
(Or Help With Home Down-Payments)
A university or college education is getting expensive, and often your children or grandchildren need financial support beyond what they can provide or what they can obtain through education loans. Should you want to support them financially, a reverse mortgage can allow you to tap into your home equity in place of them taking out a loan or even passing on the chance to pursue a higher education.
In addition to this, using a reverse mortgage to help the kids or grand-kids out for a down-payment on their home has become very popular – especially in hot housing markets like Toronto and Vancouver where home affordability has dropped considerably recently.
5. Pay Existing Debts
(And Avoid Having To Take Out New Debts)
Your interest rate for your credit card debt can be around 10-20% and sometimes upwards of 20%.
At that kind of interest rate, you can quickly become overwhelmed with a mountain of debt if you fail to pay off your monthly balance each month.
Reverse mortgage rates are much lower, so if you take out a reverse mortgage and pay off your credit card debt, you will be in much better shape financially. This is especially true of retirees who don’t have access to income – don’t become buried under your credit card debt. The consequences can be drastic and will escalate quickly.
By taking out a reverse mortgage to offset your credit card debt, you eliminate that risk with a much safer type of loan – one that will never see you lose your home or have to declare bankruptcy.
6. Live For The Retirement You Wanted And Planned For
Retirements look different from one person to the next. For one person, retiring comfortably in their home and community can be fulfilling, for another person a retirement may involve long-awaited travel to exotic locations – there’s no one or right way to have the retirement you plan for.
Sometimes, though, savings and pension are not enough to be able to realize that retirement plan.
The money you’ve built up in your home, however, is a large potential source of money that otherwise lays untouched and unreachable – this is where a reverse mortgage allows you to access some of this money in a low-risk manner that can allow you to realize your retirement plans.
This is why Japan calls the reverse mortgage product a ‘Home Pension’.
7. Get Rid Of Those Pesky
Monthly Mortgage Payments
Aside from getting rid of your mortgage payments, another alternative is to downsize in your retirement and then use the proceeds from your home sale to pay for the purchase of a new, smaller home (see number 8 below) – you then can take out a reverse mortgage to make up the balance of the house purchase price.
The remaining reverse mortgage amount can be used as they see fit, all the while not having to make monthly payments and qualify for a standard mortgage that would be required from a ‘regular’ home purchase.
8. Buy A Home
A reverse mortgage can be used – in the same way as a normal mortgage – to buy a home.
Of course, you would need to have a down-payment of at least 45% since the maximum reverse mortgage you can get is 55%. It should be noted that this is the maximum amount though – you may not qualify for the full 55%. How much you can get depends on your age, the house type and location.
But people can and have used reverse mortgages to buy homes that they can then live in for the rest of their lives – without paying a penny towards the mortgage.
In Summary – 8 Interesting Ways To Use A Reverse Mortgage
As you can see, reverse mortgages can be used in many different, often creative ways to help either support you in times of financial difficulty, be a support during times of health emergencies, or even to be used to live out the retirement you planned for comfortably or support family financially.
We have also written an article looking at when is a reverse mortgage not right for you – so make sure and check that out.
Got any questions, concerns or queries regarding this article? Leave us a comment below and we’ll get back to you.
And if you’re thinking about getting a reverse mortgage, not sure if it’s right for you or are simply looking for the best deal – simply fill out our free 90 second reverse mortgage assessment – and a Chartered Accountant will review your information and advise you on the best options.
A Canadian Chartered Accountant and licensed Mortgage Professional – creator of Reverse Mortgage Pros – the #1 reverse mortgage specialists in Canada. I make it my mission to educate Canadians about how reverse mortgages work so that you can make an informed and educated decision that’s right for you and your family.