Reverse Mortgages

Reverse mortgages are gaining more ground these days and will continue to do so.

They are a popular choice for many people in retirement needing a cash injection or wanting to give an early inheritance.

Here’s a few reverse mortgage myths:

1. It’s just going to use up all my equity and leave me with nothing – False – Compared to the reverse mortgages offered in the US, our program is quite conservative.  Our average advance is about 38% of the value of the home, with our maximum being 50%.  This still leaves a lot of equity in the home.  It is true that if you borrow money and never make a payment, the balance will grow, however, history has shown that real estate tends to go up over time as well.  With our average client lasting about 10-12 years with CHIP, and the 50 year average for real estate appreciation being over 3% in Canada, we have seen that the value of the home tends to increase over time just as much, if not more, than the balance owed to CHIP.  With our rates currently ranging from 4.95% to 5.49%, the much higher house value doesn’t need to go up at more than 2-3%/yr in order to keep pace with the CHIP.  *CHIP also gives a guarantee that regardless of what happens in the market and how long the client lives there, the amount to be repaid will never exceed the fair market value of the home at the time it is sold*
2. I lose control of my home and I’ll be forced out down the road – False – As long as the client maintains the home in good livable condition, keeps fire insurance up to date, and either pays or defers their property taxes, CHIP doesn’t require a payment for as long as at least 1 applicant lives in the home.  This brings security and peace of mind in knowing that even if one spouse leaves, or they are faced with unexpected expenses, there isn’t a big mortgage payment looming overhead.  The payment of zero remains a payment of zero for as long as they want to stay.  Whenever they choose to leave or sell, we get paid back as a first mortgage, and the rest of the equity is theirs.
3. It costs too much – False – The only costs associated with obtaining a CHIP are the appraisal and legal fees.  We do require that every single client obtain independent legal advice at a cost of approx $300-$600, but we also have a promotion right now where we are waiving the CHIP legal fees on a 5 year term.  This means you can get into a CHIP for just the cost of an appraisal and ILA (both of which can be paid from proceeds if needed)
4. The rate’s too high – Since becoming a bank and raising our money through GIC’s, the interest rates for CHIP have come down.  Rates range from 4.95% to 5.49% depending on which term is taken.  Considering we are a pure equity product that has no credit check, no income confirmation, and gives the client the choice to make payments or not, it’s actually a pretty good rate in my opinion.  If a client doesn’t have the income or credit to handle a standard mortgage or line of credit, CHIP is a great alternative to more costly “B” or private options.
5. There are no medical, income or credit checks at all
6. A secured line of credit can do just the same thing at a lower cost – False – I am all for a secured line of credit if it’s the right fit for the person, and they have the cash flow to handle it.  A reverse mortgage isn’t for everyone, but it is a perfect fit for some.

–Firstly, a line of credit typically requires a certain credit score and income level in order to qualify.  If the person is a senior on a smaller fixed income, and/or they have any credit blemishes, the line of credit may be tough to qualify for.

–Secondly, even though you can give a larger line of credit to help make the payments, there is an end date to how long that lasts.  Whenever the money is used up, and they no longer have the credit to pay the credit, they may be left with a payment they really can’t afford.  CHIP allows clients to pay the interest if they like to keep the balance from growing, but we will never ask for a payment for as long as they live there.

–Thirdly, CHIP protects their cash flow in the case of rising rates.  With a line of credit, the payment goes up when rates go up.  With CHIP, they may see a rate increase at renewal which will cause the balance to grow more quickly, but their payment of zero remains a payment of zero, protecting their cash flow and allowing them to remain in the home.