Broker debate: reverse mortgages

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They are becoming more popular but brokers are divided on whether reverse mortgages are the best option for aging clients looking to take advantage of equity in their homes.

“I can understand why many homeowners would be attracted to this type of finance as it’s a fixed rate compared to a HELOC, and it’s a way of getting cash quickly if you are going through a financial patch, but it’s not ideal, especially if you want to sell in the future,” Marc Abramovitz from Northwood Mortgage and founder of ilovemymortgage.ca said. “There are a lot of other options available and homeowners really need to do a lot of due diligence and get independent advice before signing up for this.”

With house prices out of reach and desperate to get their hands on hard cash quickly, many homeowners are expected to use reverse mortgages to help their offspring buy their first property.

And while reverse mortgages have been available since the introduction of the Canadian Home Income Plan in the mid-1980s, very few financial lenders have openly offered the product. However, with an aging population and dependent children needing help with down payments, there has been a report of rising interest in this financial method.

“I am seeing a lot more use and interest in reverse mortgages, especially for those who are in difficult situations,” Abramovitz said. “For example, one my clients had no mortgage on her home, and needed cash to reinvest back in her house. Her only other was to sell the property so a reverse mortgage was the best solution.”

For his part, Terry Kilakos of North East Mortgages believes reverse mortgages can be beneficial for older clients who require money and have paid already paid off their homes.

“I think it’s a good tool to have to offer older clients; I don’t compare them to HELOCs; they’re a different tool altogether,” Kilakos said. “People also have the option of taking the reverse mortgage in either a lump sum payment or (staggered) payments.”

These staggered payments can be treated like a paycheque in the event that a pension is not providing enough income.

Lenders rarely give reverse mortgages to borrowers younger than 62 years-old while the loan-to-value ratio can be as low as 25 per cent after accounting for closing fees. The mortgage can be paid off from the proceeds of the home’s sale, or by the estate in the event of a client’s passing.
 
  • Angela Wong-Liao - Invis Inc on 2014-04-01 11:43:24 AM

    As a baby boomer, I am exploring "Reverse Mortgage" option for some of my older clients who are house rich but cash poor. "Reverse Mortgage" is not for everybody and it is depending on the need of the potential applicants. Equity Bank is registered as one of the schedule 1 bank in 2008 (it was formerly CHIP). The maximum LTV is 50% but clients can put on a second behind up to LTV 65% with the bank's approval. Equity Bank advertised for homeowners over 55 but I believe it is more likely for homeowners over 65. The bank offers both fixed term and variable rate mortgage product, applicants can draw down monthly to supplement their pension income or lump sum for home care services, investments or helping their children. The estimated cost for setting up is $1,495 + HST if applicants do not have mortgage lien on property. One of the attractive feature of "reverse mortgage" is that the applicants do not required any income or credit rating qualification. I have changed my opinion of "reverse mortgage" after I did a detail analysis of the product. I believe it can add value to older applicants who may not be able to qualify with a regular lender but have lots of equity in their own homes.

  • Omer Quenneville on 2014-04-01 8:19:39 PM

    While the reverse mortgage is an option it is an option that should only be considered after all other options have been rulled out or absolutely no other option is available.

  • Gord McCallum on 2014-04-10 7:15:10 PM

    Like anything, a reverse mortgage is a tool in the toolbox that can be used for good or evil.

    I think HomEquity Bank does a good job of ensuring proper legal consultation is in place for people exploring this option. There are reasonable underwriting policies in place to limit risk to the bank, and guarantees in place that limit risk to the borrower.

    We've referred a lot of these over the years and we've seen many positive stories where the client was really well served by a reverse mortgage and it truly was their best (and sometimes only) option. Glad to have it available to us and our clients.

  • Daniel McKay on 2014-04-11 6:25:16 PM

    I'm in agreement with Gord & Angela. Reverse mortgages fill an important lending void in the niche market for the 55yr+ Canadians looking to access some of the equity in their home. All too often, a reverse mortgage is the only option as I believe the lending industry for the most part is discriminating against this demographic with cookie cutter underwriting practices regarding GDS/TDS & retirement income. 35/42 debt servicing limits certainly make sense when applied to the demographic (25-45 year olds) they were designed around. Borrowers in this age group certainly take on significant levels of consumer debt, have or will have dependants, spend a higher proportion of their income on entertainment & toys, should be devoting a portion of their income to savings etc. But how many of these factors truly apply to most 55+ year olds? I once had an underwriter tell me "We can't accept annuity income, because their is no guaranty that it is permanent." my response was "You might want to research what an annuity is, because it actually is guaranteed income to the annuitant until their death." Only one of the big 6 Banks has a true equity/net worth program that I'm aware of that can finance these types of borrowers, and the monolines and the insurers won't touch them. I recently got 2 declines prior to an approval on a 17%ltv, 54% TDS for a gentleman that fits into the 55-65 age group. I bet most of you reading this saw the 54% TDS, and jumped to the conclusion that this borrower should not qualify for financing, while completely overlooking the fact that at 17% ltv, how much risk could possibly exist in financing this borrower? Say what you want about reverse mortgages, but until the rest of the lending industry develops some appropriate lending guidelines for this ever growing borrower segment, they are a good, and all too often the only option.

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