TIRED OF A RISING PAYMENT ON YOUR LINE OF CREDIT?
Thanks to 5 increases in the prime rate by The Bank of Canada since July 2017, those with credit lines have watched their payment increase 5 times as well.
For those with plenty of disposable income, this may not be a big deal. BUT, for retirees living on fixed incomes, each of those rate increases can mean having to cut something else out of the budget.
Given the forecast for additional rate hikes in 2019, it may be time to learn about and consider a Reverse Mortgage.
A Reverse Mortgage is essentially a mortgage where making payments is optional. You are given a credit limit on your home (amount is based on your age and property value/type/location), and the tax free money can be used as needed. There are NO PAYMENTS REQUIRED as long as 1 applicant lives in the home. Interest simply accrues over time and is paid back to HomeEquity Bank when the home is sold
HOW A REVERSE MORTGAGE WORKED FOR MR AND MRS WILLIAMS:
At age 70, and now retired, their total income was about $3000/mnt combined. They watched their home go from $500,000 to $900,000 in the last few years, so are equity rich but don’t want to move. They have a secured credit line on the home which they took out right before retirement and have been using it for travel, helping family, etc. They currently owe $200,000. The interest only payment on this $200,000 line of credit was $533 in June of 2017. After 5 increases in prime rate, they are now paying $741/mnt for that exact same debt. After paying this interest payment each month on a loan they never intend to actually pay off until they sell, they are only left with $2259 total income for everything else. Getting concerned about this payment and more increases to come, they decided to take advantage of all their equity and convert their line of credit to a reverse mortgage.
-They received a new credit limit from a Reverse Mortgage for $303,000 which they used to pay off the existing $200,000 line of credit.
-Since no payments are required, they are now saving $741/mnt in interest only payments that they no longer have to make, PLUS, they still have $103,000 of available credit on the reverse mortgage which they can tap into, as needed, for anything they like; all without the burden of making any payments.
-While the interest will add up over the years, very conservative house appreciation of just 3%/yr should more than make up for the accruing interest, still leaving them with plenty of equity in the end.
-Their line of credit today was at P+1% or 4.95%, but they had to make payments. With the reverse mortgage, they chose to select a 1 year fixed rate of 5.49% which was only .54% higher than their line of credit, but they didn’t have to debt service for the $300k limit and they don’t have to make payments.
SOME OTHER BENEFITS TO CONSIDER:
-Should something happen to one of them, the other spouse isn’t left having to make a big line of credit payment on their own, with half the income to do so. The reverse mortgage stays in place, the surviving spouse still has access to the available credit, and they don’t have to make payments or be forced to sell during a difficult time.
-They may be able to draw down their investments more slowly, lowering their taxable income.