Home Equity Bank:
They are the only mortgage in Canada where payments are truly optional
There are NO PAYMENTS REQUIRED for as long as 1 applicant lives in the home, however payments can be made if they wish.
NO medical required, and very limited income & credit requirements
Clients can receive up to 55% of the value of their home in tax free cash, depending primarily on their age and property type/location.
Common objections are:
I heard they were restrictive and bad for seniors – Much of the negative press around reverse mortgages originated out of the US, where the programs have been run much differently. The rates, fees, and restrictions are quite different from HomEquity Bank in Canada; a chartered bank since late 2009. Since becoming a schedule 1 bank, the costs improved, and HomEquity Bank has tailored their product to be more like a credit line, but with completely optional payments. They partner with every major bank in Canada, most credit unions, and with mortgage brokers.
The bank will own my house – This is only a mortgage, so title remains 100% in the client’s name. They will not be asked to move, sell, or make payments for as long as at least 1 applicant lives there. They leave on THEIR terms.
I’ll lose all my equity – The maximum they lend is 55% of the value of the home, and the average advance is more like 35% of the value. This leaves quite a lot of equity as a cushion. If the real estate market increases at an average of about 2% to 2.5% per year over time (inflation), clients will find their home value increasing just as much over time as the balance owed to HomEquity Bank, leaving plenty of equity in the end. After 30 years in business, their average client still has more than 50% of their equity left at the time they leave or sell.
*HomEquity Bank also provides a guarantee that the client will never owe more than the fair market value of the home at the time it is sold*
The costs are too high – Since becoming a schedule 1 bank in Oct 2009, many clients are surprised to see how much the program has changed. With best rates currently ranging from 4.49% to 4.99%, and set up fees including just legal and appraisal, starting a reverse mortgage has never been better.
A line of credit is better and cheaper – A line of credit is a great solution for someone with good credit and good cash flow, who qualifies with today’s guidelines.
- While the initial rate is cheaper than a reverse mortgage, it’s a variable rate that can change at any time at the lender’s discretion
- They require a regular minimum monthly payment, which can go up if rates rise. For seniors on a fixed income, they may have equity, but don’t want to add another payment into their budget
- LOC’s have become quite difficult to qualify for, leaving many fixed income seniors thinking they have no option but to sell or take a more expensive “B” or private mortgage.
- If the line of credit is being overused, there could easily come a time when they have no more available credit, and they can’t afford the payment, leading to a forced sale. By this point, they often times owe too much for HomEquity Bank to help.
- If one spouse passes away, many FI’s require the remaining spouse to re-qualify for the LOC limit on their own income, often times leading to a suspended limit and a larger monthly payment.
I paid off my mortgage, and I don’t want debt. The equity will go to my kids – When you think about it, taking money out of the house isn’t actually debt, as it’s YOUR money. Only the interest that’s adding up is actual debt, and that’s just because you are still living in the asset you are trying to spend.
- Consider this: What if you didn’t have your house, but instead you put money into an RRSP since you were in your 20’s, and come retirement time you had $600,000 in that investment. You and everyone in your family would expect you to start drawing down on that investment to help fund your retirement, and you would be paying tax on that money you are taking out. If there were $300,000 left in the end that would be just fine, correct? They usually agree. So, that didn’t happen for you, but what did happen was that you paid a mortgage for many years, putting money towards an investment that went up over time and is now worth $600,000. That’s your major life investment, so why is it different to need to draw down on some of that source of savings to help fund your retirement? If you spent half, and there was $300,000 left in the end, you haven’t left your kids a $300,000 debt; you’ve left them $300,000 of your savings.
- Ask your children if they would rather see you pinch pennies during retirement in order to leave them the maximum equity in the home, or whether they’d prefer to see you enjoy the retirement that you worked so hard to get to.
- This can actually be a great tool to give warm inheritance today, while you are alive and able to experience the joy of giving and helping your children, as opposed to just being part of an estate that gets processed when you pass. Because there is no payment to make, you can do whatever you like with that tax free money, and it has no impact on your monthly budget.
Why are the rates higher than a regular mortgage? – Most banks can lend out money that is not costing them much, such as the .5% you are getting on your savings account. Plus, they require a lot of paperwork to ensure you qualify and can make the payment. Because of the low risk and low cost of funds, they can offer the rates you see.
- HomEquity Bank doesn’t offer other products to earn profit or raise money. They actually raise money by selling GIC’s through most of the major banks in Canada, but those GIC’s pay people close to 2.5%, meaning the money HomeEquity Bank is lending out, is costing them almost 2% more than what it costs traditional banks. In addition, there is no payment required, and qualification is based primarily on age and property….plus, they guarantee you will never owe more than the fair market value of the home at the time it is sold.
I heard they have high penalties and you can’t get out very easily – They are the best solution for people looking to have the mortgage in place for 3+ years. If the plan is to sell and pay them out in a year or two, there might be better options.
- Penalties are always waived upon death of the last applicant
- Penalties are reduced by 50% if selling and moving into a care facility
- Otherwise, the penalties in the very first 3 years are as follows – 5% of the balance in year one, 4% of the balance in year two, and 3% of the balance if in year 3. After that, just a flat 3 months interest.
- Once the account has been open for 5 years, it can always be paid off on the anniversary date without penalty.
I don’t need very much money so it’s not worth it – The newest program offered is called Income Advantage, and it allows clients to access money slowly over time, only when they need it, and interest is only accruing on the funds that have been advanced. They let you take out lump sums as needed, or even have the money advanced automatically for a certain amount each month. The minimum advance required is $25,000, but the rest of the credit limit can be accessed on your own terms, if and when needed.