Using a Reverse Mortgage to Help Your Kids with a Down Payment

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If you’ve paid attention to the news in the past few years, you already know that Canada is in the midst of an affordable housing crisis. Property prices across the country have skyrocketed, and as a result younger families are stuck renting while their parents amass significant (but unrealized) wealth in the family home. This generational imbalance is far from ideal, and many Canadians are wondering how they can help their kids, without risking their own financial position. A reverse mortgage might just be the answer - and here’s why.

Canada’s Housing Crisis in Numbers

Canada’s average house price is over $716,000, and in major urban areas (like Toronto and Vancouver), this number rises to more than $1.15 million. A conventional down payment is 20%, which means that if you’re buying the average home, you’ll need more than $140,000 in cash. And in big cities, this is more like $200,000.

Very few young people are able to save this kind of money, and very few parents have this amount sitting around in savings to pass on to their kids. Retirement is a financially delicate time for many; the average Canadian senior has just $180,000 in their RRSP, and they need this to live on. So, drawing from personal savings to help the kids is simply not an option for most.

There appears to be an impasse, and the risk is that only those from very high net worth families will be able to access the housing market. As a result, one of the single biggest drivers of wealth generation - home ownership - will be unavailable to the majority, and the typical Canadian family will be left out in the cold. 

The Traditional Solutions

In the past, even before the current housing crisis, parents had limited options available to aid their children and grandchildren. Some sold their family home and downsized, passing on the proceeds to the next generation to use as a down payment on a new home. Some risked their own retirement to help their loved ones. And others simply decided to wait until their children would naturally inherit upon their passing.

But none of these solutions is very practical. Moving is a hassle, and because property prices are so high, even downsizing may not release the kind of funds needed to secure two new houses. And waiting for a traditional inheritance means your kids could be in their 50s or 60s by the time they get a financial boost, meaning decades of missed home ownership and home equity wealth generation. Fortunately, there is a better way.

The Reverse Mortgage Solution

There is a way to help your kids now, without risking your retirement or selling your home, and it’s via a reverse mortgage. By taking out a reverse mortgage on your existing home, you can access some of the wealth you have built up in it, without having to move or worry about burdening yourself with new mortgage payments that’ll increase your cost of living and deplete your retirement savings. 

The logic is sound: your children will likely eventually inherit your home (or the equity in it) anyway - a reverse mortgage simply allows you to accelerate the timeline, and gain access to that equity now. Of course, it’s your choice what to do with the released funds, but gifting them in part or entirely to your kids for a down payment on a new home means that they can gain access to the property market and start building their own wealth. This sets up a cycle of success for your family and means you can witness the financial benefits your children and grandchildren will enjoy, thanks to your assistance.

Reverse Mortgages in Action

To illustrate, let’s see how a reverse mortgage of just $100,000 can make home ownership for your children an achievable reality:

Let’s say you live in a home worth $500,000, and you’re planning to live there throughout your retirement - for another 25 years or so. In the future, your intent is for your son or daughter to inherit the house. Assuming 5% annual home price appreciation, that means they’d be coming into $1.7 million - but not for another 25 years!

If you were to take out a 20% reverse mortgage, at a rate of 5%, you would receive $100,000 in cash, which you could then pass onto your child, which they could use as a down payment on a home of their own. A $100,000 deposit and a standard 80% LTV mortgage means they’d be able to buy a house worth $500,000. Your personal cash flow and retirement savings would not change at all. And, this process can happen entirely tax free. 

Then, in 25 years, they will have paid off their own mortgage, and will own their own home (now worth $1.7 million) outright. They’ll also inherit your home, and after paying back the reverse mortgage, would still realize over $1.3 million from it. This means a total of over $3 million in cash and real estate - they’d be almost twice as wealthy as they would have been if you hadn’t helped them purchase their own home!

Why Wait?

If you have kids who are struggling to afford a place of their own, there is something you can do about it. Areverse mortgage can be a practical, affordable and financially savvy way to help them, while preserving your retirement security and improving your whole family’s long term outlook. There’s no time like the present. Every year your children sit on the sidelines of home ownership they are missing out on what has been the single surest route to financial security in recent decades. With limited new home supply and prices forecasted to rise, now is the best time to consider a living inheritance for your family. Bloom is the newest Canadian reverse mortgage provider helping 55+ Canadians grow their family’s wealth.