Managing A Mortgage In Retirement - A New Canadian Reality
More and more Canadians are hitting retirement with a mortgage or other debts. While some choose to take a mortgage while their investments make them more return; for many it is simply a necessity. The flexibility to have mortgage freedom should still be the focus and goal of all homeowners. But what if that milestone is fast approaching and you just cant get there? Or, you are past retirement, you do have debts, and you are struggling on a pension income?
According to Statistics Canada, 34% of retired people over 55 are still carrying debt. Equifaxs most recent quarterly report in September noted the highest delinquency rate increase was for Canadians over 65 at 7.13%. The new reality for many Canadians changes the conversation from you must pay your mortgage and debt off to how can I work these into my new retirement cashflow and budget. So, what are your options? There are a number of ways retirees can balance their budget while still carrying debt.
Focus on Monthly Cashflow vs. Mortgage Payoff
If a mortgage cant be paid off prior to retirement, the goal changes from mortgage freedom to the ability to manage your housing costs on a new lower income. Making sure your monthly expenses do not exceed your monthly income becomes the focus. Here is an example:
Jan is within a year of retirement. A divorce 5 years ago set her finances back and she will be retiring with 10 years left on her $80,000 mortgage. Her monthly payment is currently $770. She has a small amount of savings but only wants to use that for unexpected costs. She manages the mortgage and other housing costs without a problem on her current income, but with her new pension income it will be difficult.
Keep Mortgage As-Is:
$1915 monthly income ($915 Old Age Security and $1000 Canadian Pension Plan)
-$770 mortgage payment
=$1145 monthly to pay everything else
Thats 40% of her pension income used up on just her mortgage payment!
Refinance - Amortize $80,000 at 2.89% over 25 years:
$1915 monthly income
-$375 mortgage payment
=$1540 monthly to pay everything else
This leaves Jan with $395 more per month!
Other Retirement Strategies
In addition to restructuring your current mortgage, you may also consider these options:
Refinance - Paying off high interest debt or debt with high monthly payments (ex. vehicle loan) into a lower monthly mortgage payment.
Downsize- Does moving to a smaller or lower cost property improve your financial sustainability?
Home Equity Line Of Credit (HELOC) - even if you are mortgage free, set this up now so you have a way to access your equity if you need it for emergencies or to pay for a downsize once you retire.
Reverse Mortgage - people have an adverse reaction to these in Canada because of far inferior products sold in the U.S. Our reverse mortgages in Canada have the necessary consumer safeguards in place. They are an important option for someone in the later years of retirement where they often hold high equity in a property, need to access it to survive financially, cant qualify or manage the payment on a standard mortgage, and selling or moving is not a viable option. I have taken specific training in this product, and while it is not a fit for everyone, it can be life changing for those that are.
Mortgage Planning - Ideally BEFORE Retirement
If retirement is in your near future (1-5 years) you should be talking to me now. If you are heading into retirement with a mortgage, have a mortgage professional look at your cashflow and your mortgage options BEFORE you are on reduced income. Mortgages have become more and more difficult to qualify for and you may not qualify for what you need once you are on a lower income. Planning ahead while you are still on your pre-retirement income can be much easier and give you access to more mortgage products.
If you are already retired there are still options. Yes, you can qualify for a mortgage in retirement! It just may be a much lower amount.
Contact me to see how a mortgage can be incorporated into your retirement plan.
New Mortgage Incentive - Understand The Benefits And How It's NOT Just For First-Time Buyers
Its here! The First-Time Home Buyer Incentive (FTHBI) officially kicked off on September 2nd, and is available for mortgages with closing dates/possessions starting November 1st. Almost all large lenders are now on board to process them.
Qualified buyers with a household income of $120,000 or less can apply for a Government of Canada shared-equity loan that will provide an additional 5% of down payment on a re-sale home, or an additional 10% down on a newly built home. The additional down payment is in the form of a shared-equity loan that will be registered to your title as a second mortgage.
This loan will lower your mortgage and therefore decrease monthly mortgage payments, making home ownership more affordable. Repayment is due when you sell or after 25 years, whichever happens first. It can be prepaid at anytime without a pre-payment penalty. The amount you will pay back is the same percentage you borrowed from them, but at the fair market value of your property when you re-pay. They share the equity you gain or the loss you incur, depending on what your market value has done. For more details check out the Government website link below or call me 780 756 5363:
The Incentives Impact - Example
$400,000 Purchase price
- $20,000 Minimum down payment of 5%
= $380,000 Mortgage
+ $15,200 Mortgage default insurance premium of 4%
= $395,200 Total loan amount
Monthly payment based on 2.64% rate over 25 years: $1,798
With Incentive (On Newly Built Home):
$400,000 Purchase price
- $20,000 Minimum down payment of 5%
- $40,000 Additional 10% down payment from the Governments FTHBI
= $340,000 Mortgage
+ $9,520 Mortgage default insurance premium of 2.8%
= $349,520 Total loan amount
Monthly payment based on 2.64% over 25 years: $1,590
PAYMENT SAVINGS: $208 per month
DEFAULT INSURANCE PREMIUM SAVINGS: $5,680
Lower Payments / Home Affordability - your monthly payments are lower which allows you more cashflow, or a way to pay down your mortgage faster if you use the savings to pay it down.
Transaction Savings - the media and government have focused on the lower payment aspect of the incentive, but in my opinion an even greater perk is the reduced mortgage default insurance premiums when the additional down payment from the incentive is factored in. On my example above, the transaction savings of $5,680 are very significant.
NOT Just For First-Time Buyers - the programs definition of a first-time buyer may surprise you as it does not line up to the CRAs definition of first-time buyer for the RRSP program; it is far more flexible, and only one borrower needs to meet the definition. The FTHBI will actually qualify many people who already own a property or who recently owned but had a marital breakdown. Here is their definition:
You are considered a first-time homebuyer if you meet one of following qualifications:
you have never purchased a home before
you are experiencing the breakdown of a marriage or common-law partnership (even if you dont meet the other first-time home buyer requirements).
in the last 4 years, you did not occupy a home that you or your current spouse or common-law partner owned
At least one borrower must be a first-time homebuyer, as per the definition.
I would be remiss to list benefits and not the negative impacts of this program. Here are some considerations before you jump on the FTHBI bandwagon:
Cost Of The Loan Uncertain - The cost of payback is the same percentage that you borrowed, but applied to the market value of your home when you sell, pay out the equity program early, or hit the 25-year point at which you have to pay it. You cant calculate what the loan will cost you without knowing the market value when you pay it out.
Flippers and Renovators Beware - if you plan to extensively improve a propertys value, then the government will also benefit from that improvement. This would be an example of when it would not make sense to use the FTHBI.
Complexity And Unknowns - No question, using the program will make future borrowing on your property more complex. Expect more hoops at refinance, renewals, and sale as the FTHBI will be registered as a second mortgage and will have to be addressed in each of those scenarios. And with any new program, until borrowers start using it and more time has passed, we wont know all of the impacts.
Increased Legal Costs - There will be more legal costs to a transaction because this requires two mortgages, not one, to be registered. Your lawyer may also charge you more to process for the same reason. I do think the default insurance premium savings, particularly with a 10% incentive on a new-build, outweigh these costs but you should understand them.
This program is complex even for those of us working in mortgages everyday. If you are interested in using the FHBI, reach out to me early to answer questions and understand if this will be a fit for your purchase.
First-Time Homebuyer Incentive - What We Do And Don't Know
Since it was proposed back in March, the First-Time Home Buyer Incentive (FTHBI) is slowly taking shape. While it is being touted as a measure to address affordability by the federal government, the response has been mixed. On one hand, it has been criticized as an overly complex program that does not address how difficult it is to qualify for a mortgage, and is simply a strategy to win millennial voters over with an approaching election. On the other hand, it does lower carrying costs and could appeal to those lower-income buyers who are hesitant to commit to home ownership because of the monthly costs. This solution was also chosen because it has a low inflationary impact on housing prices.
Regardless of how it is viewed, it is clear the Government is pushing to roll this out before the election. While we wait for clarity from lenders on if and how they plan to implement the FTHBI, here are the high points of what we know and what I still see as the gaps in understanding today:
What We Know
For first-time buyers with a qualifying income of $120,000 or less, you can apply for a Government of Canada shared-equity loan that will provide an additional 5% of down payment on a re-sale home, or an additional 10% down on a newly built home. The additional down payment is in the form of a shared-equity loan that will be registered to your title as a second mortgage. This loan will lower your mortgage and therefore decrease monthly mortgage payments, making home ownership more affordable.
September 2, 2019 - start date for applications
November 1, 2019 - start date for closings (possession dates)
Repayment is due when you sell or after 25 years, whichever happens first. It can be prepaid at anytime without a pre-payment penalty.
The combined mortgage and FTHBI amount is capped at four times your qualifying income.
The amount you will pay back is determined by the fair market value of your property when you sell or pay back the loan. They share the equity you gain or the loss you incur, depending on what your market value has done. You pay back the same percentage you borrowed, but of the current value when paying it back.
You must have the minimum down payment (5% of the first $500,000 of the lending value and 10% of the lending value above $500,000) from traditional sources to participate. This can be gifted from a relative, saved, or withdrawn from an RRSP. No flex down allowed (borrowed down payment).
Mobile/manufactured home purchase will only qualify for the 5% loan, even if brand new.
At least one borrower must be a first-time buyer, as per the definition given by the Government of Canada. (see resource link below).
It must be an insured mortgage, through any of the three insurers, with the first mortgage greater than 80% of the value of the property. The insurance premium is based on the loan-to-value of the first mortgage only (i.e. after the Incentive is added to down payment)
What We Do Not Know
Renewals - will you be able to switch lenders for better rates at renewal? Because the governments interest will be registered as a lien or second mortgage against your property, it makes switching lenders more complex. Clearly consumers would be at a disadvantage when it comes to negotiating a new rate at renewal if their lender knows they are not able to move the mortgage elsewhere. This has not been addressed.
Income Calculation - this entire program is really based on your household income level. So what number will be used to determine your household income: Your salary? Your Notice of Assessment income level? The nitty gritty details of how this will work are still unknown 6 weeks from the start of the program.
Lender Participation - The only way this program can be accessed is if mortgage lenders support it and are given the time to set up their systems to actually process them. We have not heard any announcement from a major bank supporting the government announced timelines. The program itself has been criticized as an election gimmick more than an effective tool to get people into homes. Will it make sense for lenders to scramble to change IT platforms, revise underwriting, and train staff on a program that could disappear post-election? We await take-up from lenders for the answer.
Pay It Back At 25 Years Or...? - It has been laid out that the government loan must be paid out at 25-years or sooner, but what happens if at that deadline you do not have the means to pay it out with savings or do not qualify for a refinance to clear it? Would the government force a sale or foreclose?
Government of Canada - First-Time Home Buyer Incentive Website
Edmonton Journal Article - Determine If The First Time Home Buyer Incentive Makes Sense For You
This program is complex even for those of us working in mortgages every day. If you are interested in using the FTHBI, reach out to me early to understand if this will be a fit for your purchase. And expect further clarifications and updates from the Government as we approach the September 2nd implementation date.