Opportunities only exist to those who have the knowledge to recognize them as such. For mortgage professionals, this is certainly true for the niche market of reverse mortgages, a small, but growing revenue source for brokers.
A reverse mortgage is secured by the equity in a home and unlike in a traditional mortgage, in which regular payments are made to the lender, a reverse mortgage pays the homeowner and no payments–principal or interest–are required until the home is sold.
Homeowners can receive up to 40 per cent of the value of their home, which is based on the age of the owners, the location and type of home and the home’s current appraised value. The full amount only becomes due when the homeowners pass away, when the home is sold or if the homeowners move out and the amount owed is guaranteed not to exceed the home’s market value. There are also several options for homeowners when receiving the money, including lump sum payment or planned advances over a set period of time. The money from a reverse mortgage is also tax-free.
The homeowner’s costs associated with reverse mortgages include an appraisal, independent legal advice and closing legal and administrative costs, which can be deducted from the income provided by the reverse mortgage.
“We describe a reverse mortgage as a solution that enables seniors to access the equity that’s built up in their home,” says Greg Bandler, senior vice-president, sales and marketing for HomEquity
Bank, the only national provider of reverse mortgages in Canada. HomeEquity Bank originates and administers its reverse mortgages (accrued value of $985 million as of Sept. 31, 2010) under the CHIP Home Income Plan brand, which has been around for 25 years. Last October, CHIP completed the transformation to a
Schedule I Bank.
According to Robert McLister, a mortgage planner and editor of the website Canadian Mortgage Trends, “Reverse mortgages offer house-rich/cash-poor seniors a source of liquidity when no better options exist.”
Identify potential clients
Reverse mortgages are an important niche market for brokers because seniors are the fastest growing demographic in the Canadian marketplace. McLister says the use of reverse mortgages could significantly increase over the next 10-15 years, led not only by the increase in the senior population, but also by other factors such as insufficient retirement planning, lower return on equities, higher health-care costs and longer life expectancies.
For Ottawa-area mortgage agent Dave Stevens of Mortgage Edge that is exactly the reason he decided to add reverse mortgages to his service offerings. It’s an area that is only going to grow going forward,” he says. “I don’t think it’s going to be much of a niche market 10 or 15 years from now. I think it will be more of a mainstream mortgage product.”
Some might say that mortgage brokers tend to deal with first-time homebuyers who are certainly not the target group for reverse mortgages, but Bandler says the opportunities are there for those brokers who pay attention and are well informed as to the advantages reverse mortgages offer seniors.
Stevens says he markets the product to seniors through various local organizations as well as through more traditional methods. “There are a surprising number of seniors online,” he says.
Bandler says brokers’ existing clients can be the biggest source of referrals. “Mortgage brokers usually deal with younger clients, the children of seniors and if they have valuable dialogue with their clients, brokers will hear about parents who want to stay in their home and a reverse mortgage might be appropriate for them,” he says.
“This represents a tremendous opportunity for brokers who are really good at opportunity spotting and understanding the clients that this is an ideal fit for.” If clients are considering moving in the next year, then a reverse mortgage is probably not the best option says Bandler. But, if they want to stay for five to 10 years, which is the typical timeframe for most clients, according to Bandler, then a reverse mortgage makes sense.
“As a broker, you want to be mindful that you are working with the client to make sure that [a reverse mortgage] is a suitable product for them,” says Stevens.
Turnkey process for brokers
Once a broker has identified an opportunity and recommended a CHIP Home Income Plan to a client, they send a referral form signed by the client to HomEquity. Then a Business Development Manager (BDM) from HomEquity will go through the education and fulfillment process with the client, including getting the mortgage commitment signed and collecting documentation. If the deal funds, the broker receives a referral fee of at least 50
“[HomEquity] has made the referral process simple and rewarding for brokers,” says McLister. “The compensation is roughly the same as a typical mortgage with far less effort required. That’s because CHIP does almost everything once you refer the client.”
“What we like to do with our broker relationships is put that fully in the hands of our people because disclosure statements are quite different than conventional mortgages,” says Bandler. “So as the subject matter expert, our BDM manages that client through the process and keeps the broker well informed along the way.”
Not only are HomEquity BDMs experts on reverse mortgages, but they are also very adept at dealing with seniors says Bandler. “They understand how [seniors] make decisions, which is quite different than say first-time homebuyers. It is a much more carefully considered solution and may take more time and involve more people, such as children or other relatives.”
Education is also very important, for both the broker and the end client, says Bandler, because reverse mortgages are not as common as conventional ones. This includes clearing up some misconceptions about reverse mortgages.
“There is the perception that over time the loan builds up to exceed the equity remaining in the home, which is absolutely not true,” says Bandler.
According to Bandler, over the long term, home equity increases at the same time that interest accumulates. For example, a client owns a $300,000 home and they opt for a CHIP Home Income Plan for $100,000. After 15 years there is still comparable equity remaining in the home based on a home appreciation rate of 5.20 per cent (the 15-year national average as reported by CREA as at August 2010) and a variable interest rate of 4.75 per cent for the CHIP Home Income Plan funds. “The clients have been able to enjoy the benefit of unlocking their home equity and putting it to work for them,” says Bandler.
For McLister there are some other things to consider when recommending a reverse mortgage, including whether to take a lump sum, invest it and write off the interest or take smaller planned withdrawals on a regular basis.
“If a client entertains the lump sum strategy, we advise their financial adviser to run a simulation showing the best, worst and likely case scenarios,” he says. “One can then compare the after-tax cost of the lump-sum approach to taking smaller planned withdrawals on a regular basis.”
Another thing to keep in mind, according to McLister, is compensation. “In many cases, it may be preferable for a client to draw from their CHIP account in planned withdrawals.
While HomeEquity pays referral fees to brokers on these draws, it’s obviously less upfront compensation than if the client were to take one lump sum. Obviously, brokers have a fiduciary responsibility to not let this impact their advice to the client.”
As more and more mortgage professionals become aware of this niche market, Bandler sees the potential for dramatic growth and “we will continue to dedicate more resources to
developing the broker side of the business.”
And from what brokers are telling HomEquity, that growth seems certain. “One thing we hear from brokers about reverse mortgages is that it is a real turnkey process,” says Bandler. “They identify the opportunity, they’re kept informed along the way as to the success of the program and receive their referral fee.”