And that’s not a good thing. Why? Because it’s a direct testament to the fact that we Canadians are not sufficiently prepared for retirement. If we were, would we be selling our house back to the bank? No. No, we would not.
What is a Reverse Mortgage?
You see, here’s how a reverse mortgage works: if you are 55 or older, you can take out up to 55% of the value of your home in cash. Tax-free. Why tax-free? Because it is a loan. You don’t have to make payments either! But since you’re not making payments, the interest you owe simply gets added to the balance each month. But what’s the rate? Likely higher than the rate when you had a mortgage for the past 25 years or so.
Now while it’s good that you don’t need to pay all that money back as long as you live in your home, it’s bad that the immense amount that you will owe upon your death or when you move out or sell the home will eat up a good part of the equity in your home. If you have no children or any charity or cause to whom you wish to leave a legacy, okay, but what if you do? Wouldn’t you rather have a large pot of investments that you can live off of in your retirement and not have to watch the bank own more and more of your home as you head into your ‘60s, ‘70s, ‘80s and ‘90s?
I am not saying that reverse mortgages are by their very nature bad – after all, we should be thankful that if we do find ourselves in a position where we need cash from somewhere, there is at least someone willing to lend us that money. After all, who else is going to be willing to lend money to an unemployed senior citizen. What I am saying is that being in a position of needing a reverse mortgage is bad.
You CAN Avoid a Reverse Mortgage
But you don’t have to be one of the people that, along with thousands of other Canadians, are causing a doubling of reverse mortgage debt in this country in only four years. Sign-ups for reverse mortgages are growing at almost 30% per year. This is a bad sign.
Don’t be one of those Canadians that has to start handing over the keys to the house they love. Implement The Smith Manoeuvre and start generating an impressive investment portfolio now – when you are as young as you’re ever going to be – so you can take advantage of compound growth in order to ensure you have the ability to generate cash flow in your retirement. A reverse mortgage CAN be avoided.