For more and more Canadians, the journey toward retirement is becoming increasingly precarious because they simply don’t have that much socked away for their expenses. The non-profit Investor Education Fund recently conducted a poll of 1,500 Canadians aged 50 and above, and the results were shocking: only 20 percent of households indicated that they would have at least $250,000 saved up for their retirement. Also, 50 percent of all households think that they will go through their savings during the first decade of retirement.
Given this significant challenge, many homeowners in Canada are considering accessing the equity that they have built up in their homes to help fund their living expenses during retirement through the use of a reverse mortgage.
Reverse mortgages for seniors requirements
How does a reverse mortgage work? Basically, if you are a homeowner in Canada and you are over 55, you can get some of the value of your home back using this type of mortgage. You don’t have to make any payments on the loan as long as you are alive and continue to live in that home as your primary residence. You can make interest payments over time to minimize the loan’s effect on your estate. If you sell the home later on, the proceeds will go toward the mortgage. Lenders guarantee (through establishing conservative loan-to-value ratios) that you will not ever go upside down on the mortgage as long as you are alive. This means that you will not lose your home, even if you live for several decades after you take out the reverse mortgage.
For many seniors in Canada, reverse mortgages are becoming more and more popular. According to Steve Ransom, CEO and president of HomEquity Bank (the administering organization for the Canadian Home Income Plan (CHIP), which is the primary source of reverse mortgages in the country), there are approximately $1.5 billion in outstanding reverse mortgages on their portfolio today. He estimates that his organization will gain about 2,500 new customers, bringing in about $250 million in mortgage revenue during the rest of 2015.
Reverse mortgage information seniors
On the average, a reverse mortgage client is a couple in the early 70s. They have already been in retirement for a set amount of time and are still living on a fixed income. Because interest rates have remained so low, that means that younger families have benefited as traditional mortgages have become cheaper. However, for seniors, those investments that they thought would bring in significant income on the basis of interest simply aren’t paying off. They bought their homes for maybe $50,000 or $60,000 four decades ago and have seen those property values balloon up to as ten times that amount. Now, they want to be able to access a little of that now, even though they don’t want to move. They have become attached to their residence, but they could really use some of the equity back.
That’s where the reverse mortgage comes in. The older you are, the more of the equity you are likely to qualify for — for the simple fact that you are not likely to live as long, meaning that you’re less likely to burn through the equity. Younger seniors can average approximately a third of their home’s equity in a reverse mortgage, while older seniors can get up to about 50 percent. This might not seem like a lot, but it is a key feature in the “no negative equity guarantee,” which means that no matter how much interest builds up, the debt will never be more than the value of the house.
This is also good news for your heirs. For example, if you also have a vacation home that you want to leave to your children but you take out a reverse mortgage on your primary dwelling, that “no negative equity guarantee” means that the bank will not be going after the vacation home as well to satisfy the loan. Upon your passing, the loan comes due — but it won’t be more than the proceeds of selling the house would be.
The interest rates on reverse mortgages vary depending on the term that you choose. Shorter terms generally have lower interest rates, and at the end of each term, the mortgage rate automatically resets to the posted rate for mortgages of that term. You can choose to pay the interest expense each year — which can lead to significant savings. However, you don’t have to pay interest — and only about one in 10 reverse mortgage borrowers in Canada makes that choice — because a reverse mortgage is really for people who can use the cash flow coming in now.
So while the cash flow out of the house’s equity is a plus, there are some drawbacks to consider before signing the paperwork on that reverse mortgage. One is that the interest rates tend to be well above the market rate for a traditional mortgage. Another risk has to do with interest rates. It is true that they are low now — and are predicted to remain low in the near future. However, there’s no guarantee that they will remain low in, say, 10 or 20 years. So if you are still around then, that could significantly alter the math on your reverse mortgage expenses. While the loan-to-value ratios are designed to keep you from going into negative equity, what starts out as a 30 or 40 percent bite out of your home’s equity could get near the whole equity if interest rates shoot up in a few years and you can’t make interest payments. Remember that, in Canada, you can’t get a fixed rate for the entire life of a loan like that. So you’re stuck with renewing at whatever the market rate at that time would be.
So how do you know what the right decision is for you and your family? Get in touch with one of our reverse mortgage specialists at Amansad Financial. We will review your current financial situation and determine whether a reverse mortgage makes sense for you. It isn’t the best choice for everyone, but it has worked out very well for some of our clients. While the clients who get the most benefit generally have a lot of home equity but lack sufficient cash flow now — but also don’t want to sell their house — it’s a decision best made after consulting an expert in the field. Let us help you make the right decision for yourself and your family!