Helping your parents and your kids? What to know about a reverse mortgage

Maybe you’re driving a parent to appointments and looking at what extra care might cost. Maybe one of your kids is trying to buy a first home or get back on their feet. And somewhere in the middle of all that, you’re trying to make sure your own retirement still works. If that sounds familiar, you’re part of what’s often called the sandwich generation, and you’re far from alone in Alberta.

For many homeowners 55 and older, the home is the biggest asset they have. A reverse mortgage is one way to turn some of that equity into cash without selling or moving. It can help in the right situation, but it has real costs and long-term effects on you, your estate and your family. Here’s a plain-language look at how it works, what to weigh, and what else to compare first.

How a reverse mortgage works

According to the Financial Consumer Agency of Canada (FCAC), a reverse mortgage is a loan for homeowners, usually 55 or older, that is secured by your home:

• No regular payments are required while you live in the home. Many lenders let you make payments if you choose to.
• Interest is added to the loan, so the amount you owe goes up over time and your equity can go down.
• It’s repaid when you sell, move out, the last borrower dies, or you default on the agreement.
• The home usually has to be your primary residence, and how much you can borrow depends on your age (and the ages of others on title), your home’s type, condition and appraised value, and the lender.
• You still own your home, and you still have to pay property taxes and insurance and keep it in good repair. Letting the home fall into disrepair or breaking the contract’s conditions can be a default, and FCAC warns that a default can lead to foreclosure.

FCAC also notes that the money isn’t taxed and doesn’t affect Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). You can usually take it as a lump sum, part up front and the rest over time, or as regular payments. Taking everything at once means paying interest on the full amount from day one, which is costly if you don’t need it all yet.

Using home equity to help family

FCAC says you can use reverse mortgage money for anything you wish. For sandwich-generation families, that often means:

• Aging parents: helping with in-home support, care costs or changes that make a home safer.
• Adult children: a head start on a first home, paying down debt, or getting through a hard stretch.
• Your own retirement: keeping your savings working for you, covering repairs, or easing monthly cash flow so you can keep your lifestyle while you help others.

Before you borrow to help someone else, be clear on whether the money is a gift or a loan, what happens if circumstances change, and how it fits with what you plan to leave each of your children. Writing it down and getting legal advice can save hard feelings later.

The trade-offs to weigh

• Higher costs than a regular mortgage. FCAC says reverse mortgage interest rates are usually higher than for a regular mortgage or a home equity line of credit (HELOC). Other costs can include an appraisal, set-up, legal and closing fees, and a prepayment penalty if you pay it off early. Some fees may be added to your balance.
• A balance that grows. Because interest is added and you aren’t required to make payments, what you owe keeps climbing the longer you have the loan.
• Less equity for your estate. There may be less left to pass on to your children or other beneficiaries. FCAC also notes your estate usually has a limited time to repay, and settling an estate can take longer than that.
• Fewer borrowing options later. You may need to pay off any current mortgage or line of credit on the home first, and you may not be able to have a HELOC at the same time.

Think about your own future needs

When you’re focused on helping parents and kids, it’s easy to forget that you’ll have your own needs later. A reverse mortgage is due when you move out, so ask what would happen if you later needed to move into assisted living or another type of care, or wanted to downsize closer to family. Equity you use now is equity you won’t have later to pay for care, a move, or a smaller home.

The federal–provincial–territorial seniors forum suggests a financial plan that looks at your current and future living expenses, income, assets and how long your savings need to last. Building your own future care into that plan, before you commit equity to family, is one of the most useful things you can do.

Other options to compare

A reverse mortgage isn’t right for everyone, and another option may fit better. FCAC suggests comparing alternatives first. Depending on your situation, these could include:

• A home equity line of credit (HELOC). A HELOC usually has a lower rate than a reverse mortgage, and you only pay interest on what you use. But you need to qualify on income and credit, regular payments are required, and payments can rise with rates. See our HELOC guide for Alberta homeowners and reverse mortgage vs HELOC: a guide for retirees.
• Refinancing your mortgage. If you still have a mortgage and can qualify for the payments, a refinance may be another way to access equity.
• Downsizing or renting. Selling and buying a smaller home, renting, or moving into a different type of housing can free up equity without taking on new debt.
• Alberta government programs for seniors 65+. The Seniors Home Adaptation and Repair Program (SHARP) offers low-interest home equity loans for repairs and adaptations (it has an income limit), and the Seniors Property Tax Deferral Program lets eligible seniors defer property taxes. Neither requires monthly repayments. Both programs say a registered reverse mortgage must be removed before you can qualify, so look at them before taking a reverse mortgage. Your parents may also want to check the income-tested Alberta Seniors Benefit, which includes help for eligible seniors living in a continuing care home.
• Tax help for caregivers. If a parent depends on you because of a physical or mental infirmity, the Canada caregiver credit may apply. A tax professional can tell you whether you qualify.

Talk it over with your family, and get legal advice

A reverse mortgage affects more than one generation, so it’s worth talking about openly. The Government of Canada’s care conversations guide encourages families to start early, be realistic about what each person can do, and plan for your own future as well as the person you support.

• Include your spouse or partner and your adult children so everyone understands the effect on your home equity and your estate.
• Get independent legal advice. FCAC notes that in some provinces your lender may require it, and even where it isn’t required, having your own lawyer review the documents helps you make an informed decision.
• Put your own paperwork in order. The Government of Alberta recommends every adult have a will, a personal directive and an enduring power of attorney, and says it’s safest to make an enduring power of attorney with a lawyer.
• Consider a financial advisor to see how borrowing against your home fits with your savings, pensions and taxes.

Questions to ask before you decide

• What is the total cost, including the interest rate, every fee and any prepayment penalty?
• How much would I owe in 5, 10 or 15 years if I make no payments?
• What happens if I, or my spouse, need to move into care or want to move closer to family?
• How long would my estate have to repay the loan, and what happens if it takes longer?
• Do I have to pay off my current mortgage or line of credit first?
• Would a HELOC, a refinance, downsizing or an Alberta seniors program work better for what we need?

Let’s talk it through

I’m happy to walk you, and your family if you like, through your options, wherever you are in Alberta, by phone or online. There’s no obligation, and we can look at whether a reverse mortgage, a HELOC, a refinance or something else makes the most sense. Call or text 403-438-0761, email johnantle@gopineapple.com, or book a 30-minute call or a 1-hour meeting. If you’re ready to look at a regular mortgage or refinance, you can also start a pre-approval online.

Quick question? Book 30 minutes. Want to go through everything? Book a full hour.

Every mortgage and line of credit is subject to lender approval, and terms, costs and fees vary by lender.