Recently we were at two properties where the owners were frustrated because they knew that their houses need work but they did not have the money to fix them or get them cleaned up for the sale.
They were retired and lived on a fixed income, which made it next to impossible to get the funds to complete the repairs or preparations to get the house ready.
The reason is that mortgages from the big 5 banks are based on the person’s income which because of retirement was very low and used mostly to keep the heat, hydro, and pay the yearly taxes. They were house poor, and the houses had fallen into disrepair.
Let’s take a closer look at this all-too-common phenomenon.
What Does it Mean to Be House Poor?
In this case, the homeowners had gone to the major banks and been told that because of income they would likely be unable to get a mortgage or line of credit commensurate with the work that needed to be done to the home.
In both cases, there was little to no financing on the property and yet the value of the property was well over 1.5 million dollars in today’s market. So over 1.5 Million dollars in equity, sleeping in the homes while it could be put to work.
In one case, years ago, our neighbour, in a house worth over two million dollars could not afford to go to the dentist and some of the neighbours got together and threatened to call the Community Care Access Centre if her family did not start looking after her better. It seemed that they were more concerned about the value of their inheritance than the health of their mother. A scene that Realtors® see way too much of.
Downsizing–or rightsizing as we like to call it–is an all-too-important step in the cycle of homeownership. Are you considering a rightsize in the future? Read some of our other blog content about it:
- Downsizing Done Differently: Our Complete Guide to Rightsizing
- Case Study: How We Moved from 3500 Square Feet to 1000
- How to Help Your Parents Rightsize
- Downsizing Your Life: 5 Tips for an Uncluttered Life
What Can You Do?
To the rescue is our Mortgage Broker, Darlene Hanley of Hanley Mortgage Group. She is able to find financing based on the equity in the home. We spoke with Darlene to get some insight into how retirees can leverage the equity in their homes to their advantage.
According to Darlene, homeowners have several options: a reverse mortgage, home equity line of credit, or a home equity loan. Here’s a closer look at each:
Reverse Mortgage
What is it?
Reserved for homeowners 55+ years of age, a reverse mortgage is known as a “lifetime product” and will not be called even if the house decreases in value. Unlike traditional mortgages, the value of a reverse mortgage is based on the home’s location, value, and age of the homeowner. Owners can qualify for up to 55% of their home’s appraised value and are not based on the homeowner’s income, making it ideal for retirees with fixed incomes.
What are the benefits?
Reverse mortgages are designed to help improve cash flow. According to Darlene, these mortgages are advantageous for retired homeowners because they are not required to pay back any amount of the loan until they decide to move or sell. Also, unlike traditional mortgages, a client cannot default on the loan and be forced to sell. Homeowners can make advance interest payments as well. Loan proceeds are also tax-free and can be paid out in a lump sum or as multiple installments.
What are the disadvantages?
If you are planning to sell your home, Darlene does not recommend a reverse mortgage. This is a long-term solution for homeowners who intend to remain in their homes.
How is a Home Equity Line of Credit or Loan Different?
A home equity line of credit (HELOC) is a type of line of credit that allows homeowners to borrow up to 65% of the value of their home. Age is not a condition, however, homeowners must qualify based on income and credit. They are required to make monthly interest payments, but the line of credit is revolving, which means homeowners can access money while only paying the interest portion.
A home equity loan is similar in that clients must qualify on income and credit score. However, a home equity loan results in a lump sum payment, and homeowners can borrow up to 80% of their home value, but a sliding scale may apply.
Have you read our downsizing with style and grace blog series? Check it out here:
- Real Estate Downsizing with Style and Grace: Part 1
- Downsizing with Style and Grace: Part 2
- Real Estate with Style and Grace: Part 3
Which is Better for You?
According to Darlene, homeowners who are planning to stay in their home should go with a reverse mortgage. She recommends a HELOC for freeing up short-term funds to prepare a home for sale.
However, if the homeowner is not able to qualify for a HELOC, she recommends a short-term open private mortgage for best results. These mortgages are a great option because equity is the key factor for qualifying here.
Darlene’s main advice? Work with an experienced mortgage broker.
Looking for more professional help in your retirement years? Read our blog on the legalities of being an executor and how to protect your investments in the eyes of the law here.
So, What Happened?
At the end of the day, our sellers were able to get some breathing room, repair their homes and have some enjoyment by unlocking the equity in their homes and using it wisely.
Is anyone you know house poor? Look around, you may be surprised and be able to explain to them that there is money in their homes that will either go to the Government or their family when it could be assisting them.
It’s a situation that we’re happy to discuss with them and will make sure that they have access to someone who can help.
These are disturbing situations and owners are completely overwhelmed and unhealthy because they lose sleep and start making decisions about medicine and food over repairs.
If you or someone you know needs a hand, contact us here and we can help!
