Good on paper

Equity rich, cash flow poor – there’s a tax-free way to supplement your income.

Retire in the home you love, and draw a tax-free income out of the equity you’ve worked so hard to build? It’s possible with a reverse mortgage.

It’s a story that many families in the Okanagan are familiar with. The retired couple with equity in their home, no pension and limited RRSPs. With the increased cost of living, inflation and low cash flow, many retirees are being forced to downsize. Some of these seniors are living on government pensions such as CPP and even OAS. Equity rich and cash poor.

Certified Reverse Mortgage Specialist Kari Gares says, “You can retire on your own terms. Many people in this older generation have been through several recessions and were taught to pay off their mortgage and be debt free, but it is possible to make the equity in your home work for you. You can draw non-taxable income from the equity and stay living in your family home.”

It’s part of a strategic financial planning strategy that many aging Canadians are utilizing in retirement years. Gares says, “It’s a way to access the equity as a non-taxable income source and supplement income for those that are cash flow tight. You can get paid from from your reverse mortgage and it is tax free. If you start drawing from RRSPs it is taxable income – and the increased income can actually lower what you receive on some pensions.”

Gares gives the example of someone living locally in a home on the lake. “Taxes are going up, they’ve lived there for many years and raised their family in the home. It’s worth a lot of money and they don’t want to sell. They want to leave the property for their beneficiaries, but they also want to supplement their income. A reverse mortgage works so that they can pay themselves an income every month or even take a lump sum payment.” Gares adds, “Interest is calculated, accrued and added to the back end of whatever is pulled out of the estate. Reverse mortgage specialists will always tell clients that it is imperative to have a will – it’s essential.”

Reverse mortgages can also be a useful tool for those that don’t want to wait until the time of death to give out their estate. They may want to donate the money to a charity or distribute their net worth to family members before they pass. This exchange of funds becomes a tax-free financial option.

Licensed Reverse Mortgage Specialist Kari Gares says, “Another type of client is one who may own their home free and clear and may be looking to diversify and invest in other properties, but they are retired and don’t have an income so they can’t qualify the traditional way for a loan. Under a reverse mortgage there is no qualification and income is not relevant. Clients must be 55 years of age and the amount is simply a calculation based on age, location of property and value of your home.”

Under this model, it is possible to take cash out of the equity in the home and invest in another property. Gares says, “They may also want to invest in other opportunities, distribute it to beneficiaries or just sit on the cash. She adds, “You can reinvest in the marketplace in other ventures without physically having to make a payment. Interest just accrues. Some people take out that cash to donate to charities and have control over where that money goes, as opposed to putting it in the will and hoping the executor fulfills your wishes.”

The interest rate on a reverse mortgage is definitely more than a traditional mortgage – ****usually 2 or 2.25% higher**** but as Gares points out, “The bank isn’t getting paid until you sell your home and refinance, or until you pass away.”

Kari Gares has a strong understanding of the financial planning industry and used to hold a mutual fund license. It’s important to note, reverse mortgages are a very specific estate planning tool and only a certified Reverse Mortgage Specialists can offer this service. Gares adds, “The product is not for everyone and it is not offered at all the banks.”