REVERSAL OF FORTUNE
Reverse mortgages are gaining popularity, but they service a very specific customer
Last year, Fred and Merle Parlby bought themselves a two-bedroom bungalow with ocean views in Campbell River. The couple, both in their mid-seventies, initially took out a small, short-term private mortgage to purchase this retirement home.
“In 2013, we sold our family business in Saskatchewan. We decided to come back to British Columbia to retire,” says Fred.
When the couple wanted to pay back their private lender–a long-time family friend–they went to their bank for financing.
“We sold our trailer and used the proceeds to pay back the loan, but it wasn’t enough to pay it back in full,” says Merle, who says they soon learned they didn’t qualify for a conventional mortgage because of the federal government’s new stree-test regulations that took effect this year.
Then Fred heard about reverse mortgages and consulted with HomEquity band, one of only two national providers of reverse mortgages. (Equitable Bank began offering reverse mortgages in January 2018.)
Their new home was evaluated at $402,000 and they qualified for a $172,000 CHIP Home Income Plan reverse mortgage, which they can access in monthly, quarterly or annual increments, or in additional lump sum payments as necessary. With no mortgage payments due, the couple is able to live the rest of their retirement in their home.
“The whole process was completely stress-free. We paid back our small mortgage and still have money to use as we see fit,” says Fred, a former truck driver. “We only pay interest on the balance when we sell our home and we don’t have to use all of the $172,000. This CHIP mortgage has afforded us the opportunity to travel and live and quite comfortably on our pensions.”
Yvonne Ziomecki, executive vice-president at HomEquity Bank, says this scenario is playing out all across the country.
“For couples like Fred and Merle, a reverse mortgage is a great option,” she says, adding the typical clients are couples in their early 70s. “The purpose of the reverse mortgage is to allow seniors who might be cash poor but equity rich to draw on their home equity, which allows them to maintain a comfortable living for their remaining years.”
The whole process was completely stree-free. We paid back our small mortgage and still have money to use as we see fit. –Fred Parlby
The Parlbys aren’t alone. A new IPSOS survey commissioned by HomEquity Bank (June 2018) cites 93 per cent of Canadians aged 65 and older want to stay in their current home throughout their retirement.
“Research findings confirm what we have known for a very long time: older Canadians want to retire at home on their terms,” says Ziomecki, adding that inquiries from seniors about reverse mortgages doubled between 2016 and 2017. “They often get pressured to move and sell and we want them to know they have options.”
Reverse mortgage versus equity takeout
A reverse mortgage is for those aged 55 and older who have equity in their home and want to remain in their home instead of moving. With such a mortgage, borrowers can potentially access up to 55 percent of the value of their home. The mortgage only comes due when the borrower dies, sells the home or moves out permanently.
“If you keep your home in good condition and pay your taxes, we won’t call the loan,” Ziomecki adds. “We also won’t call the loan if one of the spouses dies and the remaining spouse wants to live out their years in the home they know.”
Meanwhile, an equity takeout is a loan taken either through refinancing, a second mortgage or a home equity line of credit. The interest on a line of credit must be paid monthly, whereas with a second mortgage or a refinance both principal and interest must be paid monthly. Like other lending products, an equity takeout requires borrowers to qualify and prove that they can service the debt. It is common for a home-equity loan to be the second lien on a house, after a first mortgage.
“When seniors make financial plans for their retirement, they often find they won’t have sufficient income,” Ziomecki explains. “Or they are helping their grown children purchase a home or pay for a child’s wedding, so they come to us to explore their options.”
Unlike a traditional mortgage, regular mortgage payments are not required with a reverse mortgage.
“The other great thing about using a reverse mortgage is that it can increase a senior’s cash flow,” she adds.
However, not everyone believes a reverse mortgage is the right solution for seniors.
“In my opinion, the only people who should look into a reverse mortgage are those who have significany equity in their homes, little to no income or investments, and are absolutely set on staying in their homes until they pass away,” says Harry Howard, a Mortgage Centre Interior mortgage broker based in Penticton. “It should only be considered as a last resort because it can quickly erode the equity in your home.”
Howard recommends that people approaching retirement should qualify themselves for a “healthy home equity line of credit” that costs them nothing until they use it.
“So, whena a major life event occurs, such as wanting to help children or grandchildren buy a home, take a once-in-a-lifetime trip or they have a medical issue for which treatment isn’t available in Canada, they have immediate access to inexpensive money,” Howard explains. “The line of credit is secured by your home and the rates can be as low as prime plus a half. –Michelle Hopkins