Reverse Mortgage
- Reverse Mortgage – how does the program work?
- Answers to most commonly asked questions.
- Reverse Mortgage program vs. Home Equity Secured Line of Credit with various banks.
- What are the negatives of Reverse Mortgages?
- Ideal scenario for the retirement period of your life.
Reverse Mortgage – how does the program work?
Reverse Mortgage is a very interesting product that has been gaining more and more popularity in Canada. The reason behind this trend is that the population owns properties like houses and condos, but very few, especially old people, have sufficient savings in their accounts.
For this group of people Reverse Mortgage is the most suitable product. However, this is not a regular mortgage and many are confused about the details of how this mortgage works. Partially, this is due to the fact that many compare Reverse Mortgage with a similar product from United States. In Canada Reverse Mortgage is very different from it’s American counterpart.
Let’s see how Reverse Mortgage works in Canada.
Let’s start with the fact, as mentioned above, that many own a house or a condo, some are paid off, but a few have good pension from the employer and the government pension is not high. Canada is a country of immigrants and the first generation is unable to save enough assets, usually all the money goes towards paying off debts, especially mortgages.
Finally, the goal has been reached, no more mortgage, but often these families do not have any savings towards retirement. Even with some savings, with increasing life expectancy, there is a possibility that the savings will not be enough for the rest of the life.
What is the next step – sell property, move into rental and spend the proceeds of the sale? Is it a good solution? Who wants to rent after spending their whole life working hard and then move into lower quality living? Probably no one.
There is an option to move further from the city, to less expensive property, keep the difference from the sale and live with that money. Is this the best option? It’s best to stay close to relatives, closer to busier area, the family doctors and hospitals (which unfortunately becomes more important).
If you like where you live, you have the ability to live there until the very last day of your life, up to 120 years and borrow against equity in your property. You do not have to pay interest on the money that you borrowed, you can withdraw a lump sum or set up a monthly payments into your account to maintain desired lifestyle.
Nobody is ever going to ask you to return the borrowed money or to move out of your property.
Let’s look into how this product works and get some answers to frequently asked questions.
- When you might need Reverse Mortgage?
– If you want to make your life more interesting and add experience. For example, your retirement income is enough for your monthly expenses, but you can borrow resources for trips and traveling. While your health allows, take advantage of it. There may come time when the doctor will recommend to stay and you may simply not enjoy it anymore. Take your grandchildren with you, pay for them and enjoy life together. Maybe parents do not have the extra funds to take the children somewhere, but you can afford it – there is equity in your property.
When you give gifts, you experience so much joy and appreciate it more than others. Enjoy life!!! You will never have to pay for these gifts out of pocket. Property value increases with time and the growth covers your expenses.
– Pay off existing mortgage to avoid monthly payments. This is a way to significantly improve your cash flow, in other words, increase the pension amount. It leaves you more money every month in your pocket to upkeep with your life style.
– Pay off various debts that may have accumulated, basically, consolidate all your debts and stop paying on them… doesn’t sound bad.
– Increase level of living by withdrawing additional funds in addition to your pension.
– Renovate your property and make it how you always wanted it to be, to improve or simplify your life.
– Help your children and grandchildren, give them some money that may help them in life. In reality, this is part of the inheritance, given to them while you are alive. This way you get to enjoy helping your children and grandchildren now, when they need it most. One simple example: younger generation has a very hard time buying a property without the help from relatives, this is practically impossible without a substantial down payment.
– Have a reserve fund that will help with medical bills, should it come to that. Unfortunately, health does not get better as we age and sometimes there are situations that require funds for various medical treatments.
– For many other things – life is unpredictable. - What are some other potential benefits with this program?
– You can have the money when you need it.
– You get to live in your house for as long as you wish.
– There are no taxes on this mortgage.
– This Is not an income, and as result, does not lower your income supplement in retirement age (GIS – Guaranteed Income Supplement).
Answers to most commonly asked questions.
- Are there any minimum regular payment requirements with the Reverse Mortgage program?
No, this program does not require any payments on your behalf, unless you chose to do so yourself. Interest accumulates and gets added to the principle, however, the program does not require any payments from you. - Is it possible that the debt will increase and become higher than value of the collateral property if the person lives for a long time?
This is very unlikely, as the property value also increases with time and the initial amount allowed for the mortgage isn’t that high, under 55% of property value. - Who owns the property now, the bank?
No, you will remain the owner of the property. Process of obtaining a Reverse Mortgage is the same as the process of obtaining a regular mortgage. You continue to be the owner and the bank adds information into registry that there is a certain amount owning under this property. - Will the heirs receiving anything after the passing of the owner or will the bank take possession of the property?
Bank only has a claim for the amount that you owe. You are the owner and your heirs are fully entitled to your property as inheritance. This is what is most likely to happen: the heirs will sell the property, pay off the amount owing to the bank and split the remainder according to the will or in an agreement. - Would I be able to sell the property or I am unable to do anything now?
You continue to be the owner of the property so it is up to you whether you want to continue living there or decide to sell. During the sale the lawyer will pay out the debt and you receive the remaining amount. - Can the Reverse Mortgage be used to cover current mortgage on the property?
Yes, that’s not a problem, just need to check what possible penalties when paying off current mortgage are. - Is it possible not to borrow a large amount and only borrow in necessary, smaller, increments?
Yes, this is up to you. You can do a one-time larger withdrawal or set-up a monthly deposits into your account, or you can simply take it in small amounts when there is a need for it. - Can the persons lose their property?
No they cannot. You are still the owner of the property and are in full control of the situation. You and your spouse can live in this property for as long as you wish. No one at no time, under no circumstances, cannot even bring up the idea that you have to vacate your home. - Does receiving the funds have any effect on the pension or any other benefits?
No, absolutely no effect. - Are there penalties if I decide to payout Reverse Mortgage in the future?
The Reverse Mortgage program works just as a regular mortgage. The amount is given for a specific period of time, if you chose to break the contract under the Reverse Mortgage program there will likely be penalties. - Are there age restrictions on obtaining a Reverse Mortgage?
Yes, there are restrictions. A Reverse Mortgage program can only be processed for an individual no younger than 55 years old. If one of the spouses is under 55 you would not be able to obtain a Reverse Mortgage. - How is the interest calculated on the borrowings under the Reverse Mortgage program – compounded?
Yes, as with a regular mortgage, the interest on the borrowings under the Reverse Mortgage is compounded semi-annually. The interest on the credit line with property as collateral is added monthly. - Are there any costs associated with opening the Reverse Mortgage program?
Yes, there are some costs. There is a cost of property evaluation (appraisal), legal fees – ILA (Independent Legal Advice) and registration fees. Other than the appraisal fees, everything else can be included into the Reverse Mortgage. - Does the credit history or income level have an effect on obtaining Reverse Mortgage?
No, there is no effect. - Can the Reverse Mortgage be processed on several properties?
Yes, it can, it can even be obtained on rental properties. - Does the surviving spouse have to vacate the property after another spouse passes?
No, there is no such requirement. The surviving spouse can stay in the house/condo as long as wish. - What is better, Reverse Mortgage or Home Equity Line of Credit?
Line of Credit works in a completely different manner. With the Reverse Mortgage program, you never have to make monthly payments. With the Line of Credit, majority of banks will require to at least pay the interest on the balance of the credit. A little more detail on the difference between Reverse Mortgage and HELOC (Home Equity Line of Credit) can be found further in a separate section. - What banks offer Reverse Mortgage program?
Two banks – Home Equity Bank and The Equitable Bank are lenders with whom we work.
Reverse Mortgage program vs. Home Equity Secured Line of Credit with various banks.
| Situation or Question | Reverse Mortgage | Home Equity Line of Credit (HELOC) | Line of Credit with Manulife Bank |
|---|---|---|---|
| Are there required monthly payments? | No payments required until the property is sold. | Yes, minimum requirement is to at least pay interest on outstanding balance. | Up to your discretions but there is no payments requirement until you reach total allowable limit. At this point at least interest on the balance is required. |
| Can you lose your property? | No, never | Yes, if you do not maintain your regular payments on the outstanding balance. | Not if you have not used up total limit. No one will bother you until you reach total allowable limit. If it gets to that point, at least interest on the balance is required or you may lose your house. |
| Can the amount of debt to the bank exceed the value of the property? | No, never. This is how the Reverse Mortgage program works. The bank assumes the risk and it is specified in the contract that regardless of what happens, you will never owe more than the value of the property. | Theoretically, yes, but it is very unlikely. Currently the credit lines are given up to 65% of the property value and if you are not making payments the interest accumulates. With a significant decrease in value at the time of the sale you may end up owing some money. | Theoretically, yes, but it is very unlikely. Currently the credit lines are given up to 65% of the property value and if you are not making payments the interest accumulates. With a significant decrease in value at the time of the sale you may end up owing some money. |
| Is it required to have an income and a good credit history to get the contract? | No, these factors do not affect the contract. | Yes, this is required to obtain the Line of Credit. | Yes, this is required to obtain the line of credit. |
| Are the prepayments allowed? | Yes, up to 10% per year. | Yes, any time in any amount. | Yes, any time in any amount. |
What are the negatives of a Reverse Mortgage?
Yes, unfortunately there are no ideal financial products.
First, the interest on Reverse Mortgages is typically higher than the usual mortgage interest or even the Home Equity Line of Credit.
At the beginning of 2021, the rate on a Reverse Mortgage was approximately 3.49%, a mortgage interest at the bank about 2% and interest on the line of credit about 3.45% (Prime plus 1.0%) or 2.95% (Prime plus 0.5%), depending on the amount of available credit. Unfortunately, in years 2022 and 2023 the mortgage rates have increased significantly.
For those who fixed their rate for a long term everything remains the same. If you currently applying for a new mortgage of course overall rate increase affected Reverse Mortgage rates. Now you can obtain Reverse mortgage with 5 year term under the interest of 6.74%.
Let’s look at an example:
Suppose that property costs $1,000,000 and a family takes a credit of $300,000. The amount of annual interest at 6.74% is $20,220. Let’s assume that the value of the property, considering inflation, increases by 2% (completely realistic, even slightly conservative assumption), in dollar value this increase will be $20,000 annually. This means there is no loss. We don’t even use the equity that was already accumulated in the property. Value of homes in Toronto continues to increase and it is absolutely reasonable to assume that they will continue to rise by 2% annually without much risk in sight.
If the family withdraws money monthly, you have a financial support month-to-month, and your equity portion continues to increase every year.
Second, you are leaving less inheritance to your heirs.
Of course, if you don’t have any debts, don’t use the Reverse Mortgage program, continue to live in your property, the price of which increases, you will leave more money as inheritance. Let’s look how important it is – to leave as large of an inheritance as possible. Yes, it is good but it is more important for you to enjoy life – you have earned it.
You have worked for your whole life and earned money, did everything you could for your children. We have to appreciate Canada as it welcomed us and that in this country value of real estate continued to grow. Not many countries have it that way.
Because of that, many of us have paid our initial mortgages taken many years ago. The value of property has increased since then. Why not take advantage of this situation and spend at least the increased potion of the equity and leave the original amount as inheritance? The heirs will receive the paid off property at its original value and possibly even higher. Not to mention that we might not even use up the extra equity, we are not a generation of spenders. I know for sure people will not waste money, but we have to live and enjoy our life. We all understand this concept, but we just always feel that it is not for us. Why not?
By the way, most likely, the money from equity growth that we take using Reverse Mortgage, will be spent on the same relatives anyway. I don’t see a problem. This is part of the future inheritance for them, the kids, the grandchildren, and the great grandchildren.
Life is very unpredictable. Sometimes children and grandchildren need money today, they are willing to take portion of their inheritance today and even ready to pay a 6-7% interest on it. They understand that they will get less money in the future (amount given today plus interest). But it so often happens that money today is much more important and will be much more helpful to our loved ones than 10, 15, or even 20 years from now, when we are gone. Then why we are just sitting on top of this treasure – let’s help ourselves and our relatives.
Ideal scenario for the retirement period of your life.
We can review one more time all the pros. and cons. of the Reverse Mortgage and the Home Equity Line of Credit.
I believe an ideal option for the retirement stage of your life is a combination of the Credit Line and the Reverse Mortgage.
I would suggest that prior to retirement, while there is income, a family registers a Line of Credit with the Manulife Bank (specifically with this bank as there are no requirements to make minimum payments on the balance) and uses it through the retirement. If the Line of Credit is used up and the time comes to start paying interest (reached limit), then you get a Reverse Mortgage and not have to pay anything for living GREAT all these years.
Why is it better to start with the Line of Credit and not the Reverse Mortgage?
I would like to point out right away, it is required to have a good credit history and income in order to open such Credit Line with Manulife Bank, as well as any other bank as a matter of fact. Our office would always be able to assist you with opening such Credit Line with a bank, and we can do this with various banks, preferably with Manulife Bank.
- Credit Line has a significantly lower interest rate than a Reverse Mortgage.
- Credit Line is much more flexible: you can use the necessary amount from the credit and return it any time without any penalties. With the Reverse Mortgage program there are limits to the amount of repayment of your debt.
- Interest on Credit Line is paid only on the balance of the credit. With Reverse Mortgage you would always have to take a little extra as you do not have daily access to your allowable limit.
Both of these programs are interesting and are designed to help in retirement and other circumstance. Our job is to analyze your situation and chose the program that you can qualify for and that will best suit your needs. We are waiting to speak to you.