One of the questions clients ask from time-to-time is whether we include their house as an asset when we do retirement planning. Typically, if the plan is to remain in the house for the duration of retirement, we don’t, but every now and then we do need to include the house as an asset in order to construct a plan that has a good probability of success.

In the past, the two potential ways to draw on the equity would have been to take out a mortgage or sell the house, and both approaches had their downsides. However, recent regulatory changes to reverse mortgages have made them a viable third option for those that need to draw on the equity in their home in retirement.

Reverse mortgages differ from standard mortgages in a number of ways, but one key difference is that while the borrower remains in the home, there is no requirement that the borrower repay the loan. In fact, one way to structure a reverse mortgage is for a lender to provide the borrower a steady stream of income based on the home value, and this stream of income can be used in retirement planning. Another option for a retiree who needs improved cash flow is to take out a reverse mortgage to pay an existing regular mortgage, which eliminates the need to make a mortgage payment. Making no payment on the reverse mortgage means that interest will accrue, but the loan does not have to be paid off until the borrower moves, sells the house or passes away.

In their early years, reverse mortgages earned a reputation as being rife with pitfalls for seniors, but in 2013, a number of regulatory changes were implemented that offered specific protections to borrowers. These protections, known as the 4 Nevers, are described as follows by Shelly Giordano in What’s the Deal with Reverse Mortgages:

  1. The homeowner and his estate never give up the title to the home.
  2. The homeowner, when leaving the house, or his estate, can never owe more than the home’s value; conversely, when the house is sold, sale proceeds in excess of the debt amount belong to the borrower/estate.
  3. Even if all the money that can be borrowed through the reverse mortgage has reached its limit, the homeowner never has to move, provide taxes, insurance and home maintenance are continued.
  4. Monthly repayments are never required or expected, although voluntary payments are accepted.

Our preference is still to exclude equity in one’s home in putting together a retirement plan. Nevertheless, not everyone is in a financial position to do this, and for those that need to include the equity in their homes when doing retirement planning, a reverse mortgage offers a way to use this equity in retirement.