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At last, reverse mortgage costs are coming down in Canada
The reverse mortgage trend is on the rise in Canada. However, there are still naysayers, and the top criticism of the reverse mortgage is that the rates are too high.
It seemed like this was a function of HomeEquity Bank serving as the lone primary provider of reverse mortgages. However, in 2018, Equitable Bank joined the market as well, and competition is, at long last, bringing rates down.
There is one difference with the reverse mortgage that Equitable Bank provides, though. While reverse mortgages typically give you a set credit limit that you can use as you need, Equitable has as a condition of the lower rates that you go ahead and take out the full amount that they approve upfront.
It is true that Equitable Bank’s rate is better. Their new “Lump Sum Reverse Mortgage” has rates that are the best that Equitable Bank has ever offered to Canadians, as the loan is available as low as 4.59 percent for a one-year fixed rate loan. That’s the same as prime rate plus 0.64 percentage points.
This means that, for the first time, reverse mortgage rates are competitive with what you can get when you take out a home equity line of credit (HELOC). Generally, these come at prime plus 0.50 percentage points, so around 4.50 percent, if not slightly lower.
Many advisers suggest using a HELOC instead of a home equity loan or a reverse mortgage because of the lower interest costs. A HELOC also lets you borrow against it as you need it, rather than taking the whole amount out at once. However, the majority of senior citizens in Canada who are cash poor cannot qualify for a HELOC because of income concerns.
This move from Equitable Bank represents an effort on their part to take a bite out of the reverse mortgage market, which HomeEquity Bank has dominated. Since the start of January 2018, for every dollar in reverse mortgages that Equitable Bank has closed, HomeEquity Bank has closed almost C$100.
However, this cut in interest rates should change that ratio. The lowest five-year fixed reverse mortgage rate available at this writing is 5.49 percent, while Equitable is 4.89 percent. That different could lead to almost $10,000 in interest savings for seniors over a decade, for every $100,000 that they borrow.
Equitable Bank says that they can make these rates profitable because they do not have to maintain capital in reserve when the reverse mortgage borrowers take out their whole loan amount at one time. When lenders approve reverse mortgages and borrowers do not take out that sum all at once, banks have to keep that cash available should borrowers come back and want to take out the other money at some point in the future. For every $100,000 that Equitable Bank has to maintain on hand in terms of balance available but not withdrawn, that costs about $500 per year. That turns into an expense because banks do not generate interest income on balances that have not yet been accessed.
According to Equitable Bank, about half of their clients who are eligible for a reverse mortgage take out just about the whole amount for which they are eligible. They will often refinance their regular mortgage to get rid of existing payments, renovate their home, help relatives purchase a home, purchase a new home without any mortgage or add liquidity to their financial planning.
At this time, HomeEquity Bank does not have plans for a product that would compete as far as Equitable Bank’s low-interest loan with that requirement of taking the full amount upfront.
If you have questions about a potential reverse mortgage, reach out to Amansad Financial today. We have access to alternative lending sources for seniors who find themselves cash poor at the wrong time – or who want to use their home equity in other ways.