Brian Matthey

What is a Reverse Mortgage? Reverse Mortgages as an Alternative Lets get something on the table first. Whenever you see Reverse Mortgages discussed in a social media format, you will see a lot of negative comments. It amazes me when I see the negative comments from people on a Reverse Mortgage who may have no working knowledge of the mortgage market as it exists today. I would also assume that some of the comments are from US-based commenters where Reverse Mortgages are totally different than they are in Canada. Finally, I would assume none of the negative commenters have done actual research into the product and are commenting on perception, not fact through experience. There are many misconceptions about a Reverse Mortgage. This mortgage does not prey on seniors. It is a product known by many as CHIP due to the heavy advertising by Home Equity Bank. Other institutions have got into the game, but their products are more restrictive. As a broker, I am certified as a Reverse Mortgage Specialist. So, when I discuss this product, I consider it amongst other financing offers for seniors. It is also a product that has the most disclosure of any mortgage product. Borrowers are obligated to have independent legal advice before they can even enter into the agreement. There is nothing hidden. Some say You will be forced to Sell if your husband dies Not so!If a spouse passes away the surviving spouse can remain in the home until he/she chooses to sell. What happens if you receive a lump sum of money? You have prepayment options. The problems are 1) that new government regulation can limit the ability of a borrower to qualify for other types of financing 2) pensions are not keeping up with expenses and taxes leaving little for debt servicing and many people do not have a large RSP portfolio to draw upon 3)Some people have seen their pensions reduced as companies fold 4) Some people have accessed too much easy credit that the Banks lend without scrutiny via credit cards and lines of credit and their credit rating has deteriorated, not to mention the ability to make payments 4) 93% of seniors want to stay in their home rather than move or relocate for a variety of reasons, so it is not so easy to sell and rent. Many homeowners find themselves sitting on significant equity without a way to access it. Yes, the Reverse Mortgage is more costly than conventional financing. A line of credit is a better option, as is a variable rate mortgage, but that has to be managed and paid by the homeowner. Compared to Reverse Mortgage, a line of credit floating interest rate interest is approx. 1.79% cheaper. A variable rate mortgage is approx. 2.79% cheaper. Now, to accomplish the same thing a reverse mortgage does and that is no payments, the borrower has to deduct his future projected payments on the amount borrowed and set that aside for the time frame that they intend to keep the house. Or, they pay the payments that some cannot afford on an already overtaxed income and the interest floats with prime so costs could go up. They may not even qualify under new government guidelines. You will see Reverse Mortgages advertised for people as young as 55. The sweet spot for getting the most equity from your home runs from age 68-80 and the most equity normally averages 35-40% of the house value and some up to 50%. The older you are the higher amount of equity you can obtain. Example-two people aged 70 with a 600K home could access somewhere between $200-$240K. Normal mortgage financing could be available up to 65-80% of the value of a home. Many families today have parents who want to stay in their home, but they are now encountering home care costs and costs in renovating the home. Those costs may fall on their children if they lack income or liquid cash to pay for the renovation costs. They may want to move into a retirement-style home where the monthly costs can be 5-6K per month or more. The RM is an ideal solution for assisting aging parents who cant afford home care, maintenance costs and upkeep but want to remain in their home, without worrying about payments. You can access an RM where you draw a monthly income to cover costs or a combined mortgage that gives you a lump sum and then a monthly income component. Some people want to give their children or family an early tax-free inheritance without worrying about payments or cashing in other assets. The Reverse Mortgage works here. Some people want a better lifestyle and the Reverse Mortgage can give them a non-taxable source of additional income. You can choose a Reverse Mortgage where you receive a monthly payment tax-free. Some need to eliminate their mortgage and debts. The Reverse Mortgage is an ideal vehicle where no other option exists or where a no payment option is desired. Some want to use their equity to buy other assets, such as a cottage, investment property, replace an aging vehicle, buy an RV, buy a boat, travel- the choice is yours. Some have used a Reverse Mortgage to put a small mortgage on a new home that has cost them more than what they sold for or to preserve some of the equity from their sale for other uses. Some say, sell the house and bank the money. That means you rent, and you sacrifice lifestyle in doing so, not to mention finding suitable accommodation. In our market, it is difficult with a 1% vacancy rate. Then you rent and rents are not cheap, so you use your equity to pay your rent, using up your equity. You have no asset that still has potential to appreciate in value and it wont be like living in your own home. Some say, sell and buy a smaller home. Possible, but many of the senior downsized styles of homes offer a lot less in amenities and often at the same cost of more unless you are selling a mansion in Toronto and moving to a smaller center. But then, do you want to relocate away from family and friends to accomplish this? Many dont. Some say the Banks all do Reverse Mortgages-maybe in the US but not in Canada and Reverse mortgages in the US are totally different than they are in Canada. Some have done some calculations saying Dont Do it because you will lose your house and have nothing left. So here is a real example for you based on the current rate of 6.74% over a 12-year period for a 205K loan on a value of 600K in a house currently. With a 1% value appreciation rate (pretty conservative) in value on the home over 12 years the value of the loan would grow to 454K and the residual equity would still be $222K. You can compare this to someone renting and using their equity to fund their rent payments. Lets assume the same example above and rent of $1600/month. Your equity would last 12.81 years and maybe little longer if you had some interest on your money. In the end, your equity is gone, whereas in a Reverse Mortgage you still have residual equity. The current regular 5-year fixed mortgage rate is approx. 3.74% so your premium on a Reverse Mortgage is 3.00% over a standard fixed mortgage. A variable rate mortgage is approximately 3.45% floating for a spread of 3.29%. A HELOC approx. 4.45-4.95% and floating, so a spread of 1.79%. You can also opt for a variable rate RM at 6.24%, which is a 2.29% -2.79% spread over a variable. So, for the many naysayers who say This is a Rip Off This is a Con Job-Not so! It is one solution that can be the ideal solution for many people who may not be as fortunate as you, who are asset rich in their home, but cash flow poor and want a better retirement lifestyle. Many may not have been as fortunate in their financial planning or have had circumstances that have impacted their health or retirement lifestyle. So, is it worth the extra cost? For many, it is for the peace of mind and convenience that comes with the benefit of no payments and a way to access the equity in their home that they may not be able to access otherwise. For others, it is a lifestyle choice. It is not for everyone, but it has its place in financing options. The processing cost of a Reverse Mortgage is from $1795-$2495 depending on the plan, which is deducted from the proceeds. You will have appraisal costs of approximately $300-$500, depending on the location of your property. You will also have a cost for independent legal advice from your lawyer. In a normal mortgage, your costs would be your lawyer and appraisal so that would average around $2000. In 2018 the growth of RMs reached an 8-year high and RMs to people over 73 grew by 63% year over year, so obviously many people are realizing the value of a Reverse Mortgage in their retirement planning. This is especially so in the age bracket from 73-80. The best part of a Reverse Mortgage is your qualification is not based on your credit, nor on your income. You only have to have sufficient equity within the allowable guidelines and ensure you have sufficient income to cover your normal living expenses, including utilities, taxes etc. I will admit I have had personal experience with a Reverse Mortgage in the US and my mothers estate. It was totally different than what is offered in Canada. When I was younger and less experienced, I had some bias based on my perceptions of what a Reverse Mortgage was. I am older and much more experienced, and I see the value to some, not all. Canadians are traditionally very conservative lenders and the Reverse Mortgage is just that. Fully documented, fully disclosed and no surprises. It is designed for success to accomplish the borrowers goals. It is not designed to make someone lose their home. They are so concerned that borrowers understand this mortgage that they will not let you proceed with it until you have received independent legal advice. I hope I have given you some helpful insight from our journey into downsizing and from my financing experience with other Boomers. As Boomers we are cautious and natural skeptics in an age of digital deception so if you are the least bit interested in talking to me about your situation, I am an open book.You can view my background and experience here:wwwbrianmatthey.com. I am not a voice in a call center. I am a Boomer justlike you who has chosen to work beyond 65 because I love what I do. I welcome your questions to brian@mtgprof.com or if you would like to discuss your personal situation, please call me at 613-561-2719. Lets talk-Senior to Senior-Boomer to Boomer Regards Brian Matthey