A lot of senior citizens in Canada are what we say, “house rich, cash poor”. This means, they do own a home with value but only have little liquid assets. The amount is often less than $50,000. Government pensions are about $800 per month which does not suffice. Hence, many are looking for other ways to tap into their home equity.
While reverse mortgages are one option, they’re not the only way. In this blog, we’ll explore the top reverse mortgage alternatives for seniors.
What Is a Reverse Mortgage?
A reverse mortgage is a loan which allows people over the age of 55 to borrow. They can borrow against their home equity and don’t have to sell their property. They don’t even have to make regular mortgage payments.
When the homeowner sells the house, passes away or moves out, the loan is repaid. Unlike the USA, this is not a regular practice in Canada. Which also means the lending rules are stricter, and interest rates higher.
Reverse mortgages can provide immediate cash flow. But, they come with downsides such as added interest, reduced estate value, and hard-to-understand terms. This makes many seniors question: are reverse mortgages good for seniors?
What Are the Alternatives?
Many Canadian seniors are exploring other options to access home equity or get retirement income. These are alternatives to a reverse mortgage loan that can be helpful.
1. Home Equity Line of Credit (HELOC)
With a HELOC, you can borrow money against your home’s value. However, you need to pay interest on the amount you use. Different from reverse mortgages, this is a revolving credit line. You get flexibility and generally lower interest rates. Plus, there are fewer restrictions regarding HELOC loans.
2. Home Equity Loan
Unlike a HELOC, a home equity loan provides a lump sum upfront. Home equity loans have fixed repayment terms and interest rates. This is one of the home equity loan alternatives seniors consider when they need a predictable repayment plan.
3. Cash-Out Refinance
Cash-out means refinancing your existing mortgage. But, the amount is for more than you currently owe. You are simply taking the difference in cash. It can be a practical way to get equity. With private refinancing, you can also get a low interest rate.
4. Downsizing
You can sell your current home and downsize to a smaller home. It can be a less expensive property as well. It’s also a good idea to move to a rental if downsizing is your way to free up equity.
This is quite a common reverse mortgage replacement option for Canadian seniors. It’s a good way to access equity without incurring new debt.
5. Renting Out Part of Your Home
For those who don’t want to move, renting out a basement suite is a good idea. You can also rent out a spare bedroom. This can help generate regular income without taking on new loans. It’s one of the more straightforward financial alternatives for seniors wanting monthly cash flow.
6. Government Assistance Programs
You can always explore the many provincial and federal programs. This includes the GIS (Guaranteed Income Supplement), and Property Tax Deferral programs. Utility rebates can also help reduce monthly expenses. For those with a fixed income, these are great home financing alternatives for retirees.
7. Life Insurance Settlement
If you have a permanent life insurance policy, you will be able to access its cash value. You can also try to sell the policy to a third party for a good amount This is one of the lesser-known ways. But, with professional help, it can be a useful alternative to a reverse mortgage loan.
Is a Reverse Mortgage a Good Idea?
Whether a reverse mortgage is a good or bad idea, depends on a few factors. Your personal financial situation, health and family goals all play a part. It also depends on how long you plan to stay in your home.
It can be a tax-free income and help you cover major expenses like home repairs or medical costs. But, it doesn’t come without risks.
Canadian seniors look for alternatives to reverse mortgages because:
- The added interest reduces the value of estate.
- Costs like appraisal fees, legal fees, and insurance are to be high.
- Repayment is triggered sooner than expected if someone chooses assisted living.
- The decline in property value leaves little equity for heirs.
There is a lot of uncertainty around the future of OAS and CPP. This makes alternatives to a reverse mortgage loan more appealing for many. But, consulting a professional can help you understand your capabilities better.
Conclusion
Reverse mortgages are just one piece of the puzzle. But, there are several reverse mortgage alternatives that you can consider as a Canadian senior. HELOC, refinancing or downsizing, each works without sacrificing financial freedom.
If you’re exploring your reverse mortgage replacement options, it’s wise to speak with an experienced mortgage broker. Take the first step toward securing your retirement plan.