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 to pay for your retirement is a bad plan. But what about using home equity to pay for the latter stage of retirement – the years when you need long-term care?

Long-term care is as unappealing a topic as there is in personal finance because it forces us to confront that fact that we may reach a point in life where we can no longer look after ourselves. Still, we need to plan for the cost of long-term care. People are living longer, which means more likelihood of dealing with dementia or health conditions that leave them at least partially disabled.

You could sell your home and use the proceeds to pay for a long-term care home or, if you’re able to live somewhat independently, a retirement home. If you prefer to stay in your family home, it’s possible to tap your equity to cover the considerable costs of home care and retrofitting your house.

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 it can be impossible to set up a HELOC if you’re retired and not earning employment income any longer. It’s best to set up a HELOC in your working years and keep it around while in retirement. The other issue with HELOCs is that you must make minimum monthly payments of interest owing. You can pay down the principal at your discretion.

Another way to turn home equity into funds for home care is a reverse mortgage, where you borrow against your home equity and repay both principal and interest when you sell or die. The interest rates on reverse mortgages are higher than HELOCs at between roughly 6.99 and 9.65 per cent. At these rates, interest can compound quickly on your reverse mortgage and erode the amount you have left after you sell.

Where do financial planners and financial advisers stand on using reverse mortgages for long-term care costs? I asked this question on LinkedIn and received a strikingly diverse range of answers that are well worth considering if you’re thinking about long-term care costs. Some planners say reverse mortgages are a last resort, while others say they’re a viable option for short periods of time.

A key point made in the planner responses is that long-term care costs are something you ideally plan for while you’re working. If you have a financial plan, paying for long-term care should be in there. If you don’t have a plan to pay for long-term care, a reverse mortgage has to be on your list of possible solutions.

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Ask Rob

Q: I recently sold my house and I am considering building a new one. In a prior column of yours, you identified several banks that allow funds within a registered retirement income fund to be used to invest in property. Those funds invested could be repaid back to the RRIF in the form of a personal mortgage. Very few banks appear to offer this arrangement and the bank I deal with stopped offering it. Are there other banks or financial institutions that still offer this?

A: I’m throwing this one open to newsletter readers. Do you know of a financial institution that allows clients to hold a mortgage in their RRIF or registered retirement savings plan. Let me know at rcarrick@globeandmail.com.

Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.

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More Rob Carrick and money coverage

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