Is a Reverse Mortgage Right for You?
That question is on the minds of many mature working and retired Canadians.
Although not a fit for everyone, reverse mortgages make it possible for Canadians to stay in their homes as they age, while creating some much-needed cash flow.
The term reverse mortgage may be met with fear and resistance.
- Canadians are taught from a young age that debt is bad. We work our entire adult lives paying off/paying down debt, including mortgages. The thought of taking on more debt can be a scary subject.
- To further perpetuate the fear of reverse mortgages, we have all heard horror stories about retirees in the US being taken advantage of by predatory lenders targeting that demographic. Those stories may be true in the US, but not in Canada.
Canadian borrowers should take great pride and comfort in our country’s lending system for both traditional mortgages and reverse mortgages. Canada’s practices have always been based on diligence, prudence, and intense regulation. That is what makes our housing system one of the most stable in the world and it is precisely why Canada saw only a fraction of the correction the US did at the turn of the last recession.
There are only two reverse mortgage providers in Canada: HomeEquity Bank (HEB) and Equitable Bank (EQB). Both are federally regulated lenders whose regulator is OSFI, Office of the Superintendent of Financial Institutions. They share the same regulator as RBC, CIBC, BMO, Scotiabank, TD Bank, and all other banks in Canada.
Their lending practices are heavily scrutinized by regular OSFI audits; many checks and balances are in place to safeguard borrowers (consumers), Canadian housing, and the Canadian economy in general.
The regulation distinction is important in comparison to our neighbours south of the border whose mortgage regulation practices absolutely failed borrowers, US housing, and the US economy.
Bottom line: When you secure mortgage financing in Canada from a bank, a credit union, a federally/ provincially regulated finance company, or a mortgage arranged by a professional licensed Mortgage Broker, your interests are highly protected.
Ideal Reverse Mortgage Customers
In 2018/2019, more Canadians 55+ accessed equity in their homes via reverse mortgages than ever before. About $3.12 billion in reverse mortgages are currently outstanding in Canada, an amount that has doubled in less than 4 years. Reverse mortgages rose 22 per cent in June 2019 from June 2018.
One was my 91-year-old client William who owns his $1.1 million condo in False Creek free and clear. On a fixed income with basic pensions, he was having trouble keeping up with his annual property tax bills, monthly strata fees, and other living expenses. William was so tight on his budget, he was putting off $10,000 in dental work and was enduring pain on a daily basis. Simply put, William was equity rich and cash poor.
William could sell his condo, put over $1 million cash in the bank, and go rent a home. The downside of that idea is he loves his home, his neighbourhood, and his friends in his building, including one special lady friend Frieda with whom he practises yoga every day! Young love isn’t just for the young!
He has frequented the nearby shops and services for years.
With a reverse mortgage, William was able to access a fraction of the equity in his home, 5 per cent to be exact. That enabled him to get his teeth fixed and have a sum available to increase his cash flow in the coming months and years. He and Frieda are planning a tropical vacation . . . he hasn’t left the country in years and now he can. William’s equity is protected, he doesn’t have to move/ sell, and the interest rate of his reverse mortgage is very reasonable.
Another reverse-mortgage client is Norma, a 78-year-old widow who has owned her townhouse in Port Coquitlam free and clear since retiring 15 years ago. Norma’s RIF investments are depleted; she had the choice of selling her townhome or applying for a reverse mortgage, so she could maintain her lifestyle in the home she loves.
Like William, Norma accessed a fraction of the equity in her home. She feels comfortable that she can stay in her home for as long as she wishes without having to move/sell to access her equity.
Essential Information about Reverse Mortgages
- You do not give up ownership of your home. You are still the owner; you hold the title.
- The equity you borrow is tax-free money. When you redeem investments, that money contributes to your taxable income. In that case, income taxes can be higher than the annual interest paid on a reverse mortgage.
In markets like Vancouver, where most all bank economists call for both short- and long-term growth in market values in housing, holding on to real estate versus selling has historically been a way to increase net worth substantially or certainly enough to offset interest paid on a reverse mortgage. Both HomeEquity Bank and Equitable Bank believe in ensuring that their borrowers’ equity positions remain strong over the life of their mortgage.
Borrowers and their families can be concerned that their inheritance will be substantially reduced. Many reverse-mortgage borrowers access their equity to provide early inheritances to their family members and the borrowers are able to see the family enjoying the funds.
Often even after 20+ years of compounding interest on a reverse mortgage, the majority of borrowers will still have a good equity.
My client Joan accessed $400,000 of equity in her $2 million Vancouver home to provide $100,000 to each of her four children as an early inheritance; they were incredibly grateful. She was able to enjoy watching them invest the money or use it for things they needed and she did not have to sell her home and downsize/move.
When Joan and I reviewed her projected equity position to see how she would fare at the end of a 10-year period, she found she will have more than enough to live comfortably when she is ready to downsize, as well as provide a second early inheritance to her children at that time.
How to Reverse a Reverse Mortgage
- HomeEquity Bank, should you wish to payout your reverse mortgage within the first 5 years of inception, charges a percentage of the outstanding mortgage balance of 5% (year 1), 4% (year 2), 3% (year 3), and then 3 months’ interest in years 4 and 5.
- Equitable Bank charges an interest penalty as follows: 5 months’ interest (year 1), 4 months’ interest (year 2), 3 months’ interest (years 3 to 10).
Notes regarding both of the above lenders:
- The penalties are reduced by 50 percent, should the borrowers need to sell their home to move into a care facility.
- The penalties are waived entirely upon the sale/mortgage payout in the event of the passing of the final living borrower.
Accessing More Equity in Your Home by Refinancing Your Existing Mortgage
Many mature Canadians are entering retirement with mortgage debt. If they meet the criteria, they may use a reverse mortgage to payout their existing bank mortgage.
Because reverse mortgages don’t require principal and interest payments, reverse mortgages increase cash flow for those whose incomes are reduced in retirement.
Reverse mortgages can also be refinanced because some borrowers may need to access additional equity in their home as they age.
At the onset of setting up an initial reverse mortgage, planning, budgeting, and structuring of the mortgage are important. Planning for 5 and 10 years ahead can save thousands in fees and penalties. A licensed mortgage professional can assist greatly with your plan and budget.
If you wish to explore the possibility of a reverse mortgage, I encourage you to reach out to a licensed Mortgage Professional (Broker) who can compare and contrast the reverse mortgage offerings for you.
Note: Names and locations of examples in this article have been changed to protect privacy.
Casey Archibald is a Certified Reverse Mortgage Specialist and tenured Professional Mortgage Broker who co-owns and manages Xeva Mortgage LLP.
Posted in Real Estate