Reverse Mortgages Could Be The Answer For Cash-Strapped Seniors
Canadians love home ownership.
The trend is slowly reversing, but as it stands today, 66.5 per cent of Canadians own their home as compared to 33 per cent who rent. At one time homeownership was even higher but increasing prices, a surge in interest rates and other factors have made the Canadian dream of owning our piece of dirt with a house on it have made it more difficult to achieve this objective.
The baby boomer generation grew up in an era when owning your own home was a statement of success. There was a stigma about renting that was often unfair and ignorant of circumstances that made renting an apartment necessary and, often, preferable.
Today, however, boomers are finding themselves in a perplexing predicament. They own the home they live in – in some cases they’ve been in the same house for decades – they’ve seen its value increase substantially, but it is suddenly unaffordable. They are essentially cash-poor. They have significant assets but most of them are tied up in non-liquid property.
Their high earning years are behind them, and they find themselves struggling to meet day-to-day obligations. Sometimes, there’s a mortgage to service. Always, there are expenses related to home ownership and maintenance; insurance, repairs, utilities, taxes and more. It can be daunting.
Ajit Hundal, a mortgage advisor in Vancouver, points to a situation that is not uncommon among retirees struggling to stay in their homes.
“We had a retired couple in Vancouver whose home was worth $2.5 million,” says Hundal. “They had a mortgage, $300,000 in CRA debt, existing mortgage arrears and high monthly bills.”
Hunjat says the solution to these pressing problems came in the form of a reverse mortgage that enabled the clients to consolidate their first mortgage, pay off the CRA debt and clear all their credit cards.
Reverse mortgages arrived in the financial marketplace in 1986 by William Turner, a Vancouver chartered accountant who created the Canadian Home Income Plan. The concept was simply to help senior homeowners over the age of 55 to access equity in their home while maintaining full ownership.
The rules are designed to give homeowners access to cash, deal with cash flow issues and allow them to remain in their home for as long as they wish.
“Many homeowners have spent decades building equity in their homes. Now they’re finding that retirement income doesn’t always stretch as far as it used to,” explains Hunjat. A reverse mortgage can let them use some of that equity tax free to make life more comfortable while staying in the home they love. For some, that means paying off an existing mortgage. For others, it means having more room in the monthly budget.
“Different products are available in the reverse mortgage space. Some offer an upfront cash refinance to help borrowers with immediate cash, while others provide monthly annuity payments to supplement a borrower’s income and improve monthly cash flow. The funds from the home equity are taken out tax free.”
Hunjat says his clients were a classic example of how the reverse mortgage can alleviate a host of problems.
“They no longer had to make monthly payments, allowing the family to stay in their home with financial peace of mind for their retirement years,” he said.
Reverse mortgages are available to homeowners 55 years of age and older. They offer up to 59 per cent of the equity in a home. Reverse mortgage eligibility is based on age, home value, property type, and location, making it an ideal solution for retirees who may not qualify for other loans. Personal loans and lines of credit often have stricter income requirements, as they require monthly payments.
Hunjat points out that once homeowners reach the age of 55 they are eligible for a reverse mortgage, however, older folks can usually access a larger portion of their home equity.
“We usually start with their short term and long-term plans and goals. How much money do they need? How long do they hope to stay in the home? What other options are available? Then we determine which product is suitable for them. As an Independent Mortgage Broker, I have access to over 300 different lending products and can help find the most suitable product based on the borrower’s wants and needs.”
Reverse mortgages have become more popular in recent years and Hunjat says the marketplace now offers more options and greater competition.
“Homeowners have more choice than they once did, which is a welcome change as there used to be only one lender in the reverse mortgage space for several years. Now there are several. Our lender partners differ in their rates, fees, lending amounts, and property requirements.
“My role is to compare the options and explain what each one would mean in real dollars, both today and down the road. I would say that the reverse mortgage segment is gaining market share as the cost of living continues to increase while income remains constant. We will likely see more lenders emerging in this space which helps keep the market competitive; it’s a win for the borrower at the end of the day.”
On the surface, reverse mortgages seem to be the ideal solution for cash-strapped seniors. But there are many considerations that come into play before a senior homeowner decides the product is right for them, including consulting with family members.
Check out the next edition of the Seniors 101 newsletter for more details about reverse mortgages including myths and risks.
(Ajit Hundal is an Independent Licensed Mortgage Broker with Mortgage Architects Inc., part of the Dominion Lending Centres brand. Through the Dominion Lending Centres network of lenders, he has access to over 300 different lending products and currently manages a mortgage portfolio of over $150 million. Our lenders range from banks, credit unions, monoline lenders, private lenders and mortgage investment corporations)