How to use your home equity to pay for long-term care

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Last week, in this newsletter, I said that relying on your home for retirement funding is a bad plan. But what about using your home equity to pay for the later stages of retirement, when you need long-term care?

Long-term care is as unattractive a subject as personal wealth management. Because long-term care forces us to face the fact that we may be unable to care for ourselves in life. Still, we need to plan for the costs of long-term care. People are living longer, which means they are more likely to deal with dementia and at least partially disabling health conditions.

You can sell your home and use the proceeds to pay for a long-term care facility or, if you have some independence, a nursing home. If you prefer to continue living in your parents’ home, you can use your assets to cover the significant costs of home care and home renovations.

A home equity line of credit is an easy way to pay for these costs, but there are two issues to consider. One is that if you retire and have no payroll income, it may not be possible to set up a HELOC. It is best to have a HELOC set while he is active and to keep it in retirement. Another issue with HELOCs is the minimum monthly payment of unpaid interest. You can repay the principal at your own discretion.

Another way to turn your home equity into funds for home care is a reverse mortgage. It borrows on home equity and repays both principal and interest upon sale or death. Reverse mortgage interest rates are higher than HELOCs, around 6.99% to 9.65%. At these rates, reverse mortgage rates can rise rapidly and erode the amount you have left after the sale.

What do financial planners and financial advisors think about using a reverse mortgage for long-term care costs? I asked this question on LinkedIn We received a surprising variety of responses. It’s well worth considering if you’re thinking about the cost of long-term care. While some planners say a reverse mortgage is a last resort, others say it’s a viable option in the short term.

A key point in the planner’s response is that care costs should ideally be planned while working. If you have a financial plan, the cost of long-term care should also be factored into your plan. If you don’t plan to pay for long-term care, a reverse mortgage should be on your list of solutions.

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ask rob

question: I recently sold my house and am thinking of building a new one. In a previous column, you mentioned some banks that allow funds in registered retirement income funds to be used for real estate investments. Invested funds may be repaid to RRIF in the form of personal mortgages. Very few banks seem to offer this arrangement and the bank I work with has stopped offering this arrangement. Are there other banks or financial institutions that still offer this service?

answer: We will publish this to our newsletter readers. Do you know of a financial institution that allows customers to hold a mortgage under an RRIF or Registered Retirement Savings Plan? Please let us know at rcarrick@globeandmail.com.

Do you have any questions? send it my way Sorry, I can’t answer all of them individually. Questions and answers have been edited for length and clarity.

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