While a conventional mortgage advances you funds in order to buy a house, a reverse mortgage is just the opposite: It advances you funds from the house you already own. In this era of declining pensions, increased longevity and costly long-term care, are reverse mortgages a godsend? Or are they another symptom of growing debt?

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More than ever, Canadians are turning relying on reverse mortgages—a “don’t-pay-till-you-die” option to create cash flow from the equity in your home—and the trend is turning conventional wisdom about debt and retirement on its head. While past generations fought hard to avoid debt in their golden years, data from the Office of the Superintendent of Financial Institutions (OSFI)—the federal government agency that supervises and regulates banks, insurance companies, and trust and loan companies—confirms that reverse mortgages are on the rise in Canada, with $3.78 billion in reverse mortgage debt outstanding in July 2019, just over 26.24% higher than the same month last year.

But given rising home values and rock-bottom interest rates, perhaps the conventional wisdom about reverse mortgages is due for an update. Are reverse mortgages a symbol of everything that’s wrong with Canada’s debt-obsessed citizenry, or a rational solution in an era of declining pensions, increased longevity and costly long-term care?

There’s a lot to consider, so this explainer will take you through the ins and outs of reverse mortgages.

How does a reverse mortgage work?

While a conventional mortgage advances you funds in order to buy a house, a reverse mortgage is just the opposite: It advances you funds from the house you already own.

Qualifying homeowners—who must be age 55 or older—can borrow up to 55% of the value of their home (depending on the home’s value and type, and the ages and genders of the borrowers). To maintain eligibility for the loan, the borrower must maintain and remain in the house as their principal residence, pay the property tax bills and keep valid insurance in place, but there are no restrictions on the use of the funds once they’re in your hands. If one spouse dies, the surviving spouse is not required to repay the loan, as reverse mortgages are not not “callable” (meaning, the lender cannot request repayment if the borrowing conditions are met).

When you’ve established a reverse mortgage, you receive funds tax-free either as a lump sum, or as regular monthly deposits. Interest accumulates on the loaned funds as they are received. The reverse mortgage becomes due when the last surviving owner dies, if the house is sold, or if the homeowner or homeowners move out of the home.

Today, there are two providers of reverse mortgages in Canada: HomeEquity Bank and Equitable Bank. (Seniors Money Canada, which came to the Canadian market from New Zealand in 2007, is no longer offering new loans.)

Equitable Bank’s reverse mortgage rate is 5.49% for a five-year fixed term, while HomeEquity’s rate is 5.59%. (Other rates, including variable options, are available as well.) If you’re thinking these rates are significantly higher than rates for regular mortgages—you’re right (and we’ll talk more about that in a moment).

How a reverse mortgage impacts your home equity

Reverse mortgages, second mortgages and home equity lines of credit (HELOCs) provide three different ways to create cash flow from a house you own. Of these three options, however, only the reverse mortgage does not require both income to qualify, and at least minimal monthly repayment during the borrowing term.

With a reverse mortgage, the existing home equity is used as security for the funds provided by the reverse mortgage. After the reverse mortgage is established, any future growth in the value of the house goes to the homeowner. (If the home falls in value, the reverse mortgage lender takes the loss—the lender guarantees that the borrower will never owe more than fair market value of the home.)

Calculating the impact of the reverse mortgage on home equity thus becomes a function of estimating the term of the loan, the home’s value at the end of that term and the interest payable on the advanced funds.

HomeEquity Bank provides two illustrations for a borrower whose house is worth $600,000 and who takes a reverse mortgage of $150,000 at current five-year rates of 5.59%, repaid after 15 years.

At a modest house appreciation rate of 2%, the homeowner has $450,000 in equity remaining when the reverse mortgage is established, and—due to housing price appreciation – is left with $451,826 in home equity after 15 years. In other words, the homeowner is—in nominal (not inflation-adjusted) terms—“no worse off” at the end of the reverse mortgage term as a result of borrowing from their home equity than they were at the start of the reverse mortgage term.

Using an appreciation rate of 5%, however, the homeowner’s equity grows to $891,662 over the same 15-year period—meaning, essentially, the homeowner’s equity doubles even as they remove $150,000 and pay $205,695 to service the borrowing costs.

		2% annual appreciation	5% annual appreciation
	Today	In 15 years	In 15 years
Home value	$600,000	$807,521	$1,247,357
Reverse mortgage	$150,000	$150,000	$150,000
Interest	$0	$205,695	$205,695
Remaining home equity	$450,000	$451,826	$891,662

Note: All figures provided by HomeEquity Bank, October 16, 2019. This example is for a lump-sum reverse mortgage with all funds advanced at the start of the 15-year term. 

Part of a bigger picture

The growth in reverse mortgages is part of a bigger picture of debt and housing wealth among Canada’s aging population. Statistics Canada data shows that debt for the over-65 crowd has increased sharply in recent years, with the proportion of indebted seniors growing by more than 50% from 1999 to 2016.

Over this period, the average increase in seniors’ debt was $50,000, of which fully 67% was mortgage debt. At the same time, however, the average increase in seniors’ assets was just over $500,000, of which 51.7% is attributable to real estate assets—meaning that seniors’ increased (mortgage) debt is, on average, moderated by their increased (real estate) assets.

HomeEquity Bank says their average customer is a 72-year-old who borrows $170,000 to pay down their debt and supplement their income. Reverse-mortgage funds could also be used to fund renovations that let you stay in your house longer, to help your child or grandchild with an “early inheritance,” to provide “bridge” financing if you wait to take Canada Pension Plan or Old Age Security benefits, or to pay for long-term care or long-term care insurance. And because the funds aren’t taxable when you get them, there’s no impact on government benefits that can be clawed back based on your taxable income, such as Old Age Security and the Guaranteed Income Supplement.

The future of reverse mortgages

The conventional wisdom on how to treat housing wealth in retirement has been to preserve it as a last-resort option, with reverse-mortgage lenders thus viewed as “lenders of last resort.” If housing wealth is not needed to help fund retirement, this view goes, the home can be left as part of the legacy for the next generation. As a result, it’s easy to find reverse-mortgage naysayers: former Minister of National Revenue Garth Turner famously quipped that reverse mortgages are “an ideal strategy, if you hate your children.”

The criticisms of reverse mortgages tend to focus on the rates, which are more than double comparable five-year mortgage rates (which might be as low as 2.5% today) and several percentage points higher than HELOC rates (which can be 3.75% and up).

Another focus of criticism is the overall indebtedness of seniors who may have few, if any, other options. This lack of options, however, is what puts reverse mortgages on the table in the first place: With lowered incomes in retirement, mortgages and HELOCs may be unavailable to many Canadians.

Simply selling the home to create the desired cash flow can present other problems, as the principal residence provides a source of tax-free compounding that is decreased by downsizing or eliminated by renting. As a result, a senior who wants to “age in place,” perhaps with the support of a reverse mortgage to cover home renovation or care costs, may find the reverse mortgage the best of their available options.

Looking backwards, the rise in reverse mortgages can be understood as Canadians’ collective response to lower costs of borrowing, gains in home equity, and reduced income security in retirement with the decrease in defined-benefit pensions.

Looking forward, whether you love ’em or hate ’em, with Canadians facing the need to cover the costs of retirement that may last well into our nineties and beyond, reverse mortgages may, in fact, be here to stay.

Alexandra Macqueen is a Certified Financial Planner and retirement expert providing advice through Pension Acuity Partners.

Considering a reverse mortgage? Here’s what you need to know

Source: Spagnuolo Law
Video Link: https://youtu.be/g3ICOXIEBik

DLC’s Update on the new Bank of Canada Qualifying Rate.

f it wasn’t for mortgages, most Canadians probably wouldn’t be able to afford a home purchase. But thanks to home loans, investing in these expensive assets is made possible.

Given the sky-high prices of homes these days, it’s nearly impossible to be able to come up with the funds to cover the full purchase price upfront.

READ: What Happens When You Miss A Mortgage Payment?

As such, would be wise to start searching for a mortgage broker or lender right alongside your search for a new home. But before you settle on one particular lender, there are a few questions you should probably ask first.

1. What Type of Loan is Best?

There are various types of loans out there, and the one that you choose will depend on your comfort level, experience, financial health, and what the lender is able to offer you.

For example, there are fixed-rate loans, variable-rate loans, conventional mortgages, high-ratio mortgages, open or closed mortgage, and so forth. Be sure to ask your lender what they offer and what the benefits and drawbacks of each are before you settle on one.

2. What Interest Rate Can I Get?

Interest rates on mortgages depend on the Bank of Canada’s prime rate and the yield on Canadian government bonds. But banks and lenders also have their own influence on rates and what they can offer. Private lenders tend to charge higher rates compared to conventional mortgage lenders.

Further, your credit health also plays a key role in the rate you can get. A healthy credit score will usually afford borrowers with lower rates, while bad credit borrowers will be more likely to be offered a higher rate because of their higher-risk profile.

In any case, asking a prospective lender what rate they can offer is a crucial question to ask given the impact it will have on how much you end up paying overall. More specifically, inquire about what interest rate you’d be able to qualify for.

READ: What’s The Easiest Way To Get Approved For A Mortgage?

3. Are There Any Prepayment Fees?

Mortgages have a specific maturity date, which is the date that the entire loan amount must be repaid in full. However, if you happen to come upon a large sum of money at some point – whether it’s from commissions at work, a pay increase, an inheritance, or a big tax refund – you may want to put that lump sum of money towards the principal portion of your mortgage.

If that’s the case, you would be prepaying part of your mortgage. You’ll want to ask your mortgage broker if there’s a penalty that exists if you were to do so. If there is, ask how much the payment penalty will be and what the terms of the prepayment are.

4. How Much Time Will it Take to Complete the Mortgage?

Depending on the market, you’ll want to find a mortgage lender who will be able to close your mortgage as quickly as possible. This is especially helpful in a hot market where mortgage closing should happen in 30 days or less.

That said, some types of home loans can take longer to process, depending on a number of variables, including your financial health and the type of home being purchased.

READ: Why You Were Denied A Mortgage After Getting Pre-Approved

5. What Documentation is Required?

Your lender is going to want to see a number of pieces of documentation in order to assess your ability to repay your mortgage. This can include things such as proof of income, employment letter, statement of assets and liabilities, personal identification, and any documentation you can provide about your credit history. Find out exactly what’s needed from the lender before you sign on.

6. What Kind of Down Payment Assistance Can I Get?

It can be tough to come up with a down payment considering how expensive housing is. That said, there may be some down payment assistance programs that you might be able to take advantage of.

One, in particular, is the Home Buyers Plan (HBP) in which you would borrow against your RRSP savings to be put towards your down payment.

Ask your lender if they’ll be able to guide you to any programs that will help you come up with a sizable down payment.

READ: What You Need To Know About The Mortgage Stress Test In 2019

7. Do You Charge to Lock in the Interest Rate?

If rates are rather low right now, you might want to lock into it as soon as possible in case they start to increase shortly after.

Locking in a mortgage rate basically involves a commitment by a mortgage lender to provide you with a specific interest rate as long as the house closes within a certain timeframe. Locking in the rate will ensure that any fluctuation in interest rates won’t affect you.

That said, some lenders might offer a rate lock free of charge, while others might charge a fee for this service. Find out if the lender charges to lock in the interest rate, and if they do, find out what the exact fee is.

Final Thoughts

Shopping around for a lender is somewhat like shopping for the home itself. Considering how long you’ll be committed to your mortgage, you’ll want to make sure the product and the partnership is just right. And the best way to do that is to ask all the right questions.

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In the 2019 Federal Budget, Finance Minister Bill Morneau announced a new plan to help First Time Homebuyers. The idea is to improve affordability by providing a government 5% Equity Interest (10% on new construction) on home sales: effectively an interest-free loan, with actual repayment terms undetermined, but due upon sale of the home.

Which sounds great, but the devil is in the details: it only applies to Insured mortgages (so 5% – 20% down payment) and is limited to household incomes of less than $120,000. Moreover, the total amount of the mortgage cannot exceed 4x the total household income, and it is there that the whole thing falls apart:

Consider a family with total household income of $100,000, good credit, minimal debt, and 5% down payment. Making some reasonable assumptions (about strata fees and property taxes):

• they would qualify under the existing rules (including the onerous Stress Test) for a $500,000 home: $25,000 (5%) down payment and $ 494,000 mortgage (= $475,000 base mortgage + $19,000 CMHC fees);
• but in order to take advantage of the new program, they are limited to a $400,000 home (= 4 x $100,000)!

As it is currently proposed (final details won’t be announced until fall of 2019), only Buyers who are already well within their means can even participate, and unless the terms of repayment are extremely forgiving, one can’t help but wonder who will want to take “advantage” of this program. We note further that in a continuing low-interest rate environment, the cost of borrowing the 5% – 10% is going to be very low anyway, and will avoid the headache, uncertainty and legal cost of having an additional interest on Title. So what’s the point?

Cheers,
Tim

Five-year fixed mortgage rates continued their upward march last week as the five-year Government of Canada (GoC) bond yield they are priced on hit its highest level in seven years. Meanwhile, five-year variable-rate discounts deepened, further widening the gap between five-year fixed and variable rates.

When I started working in the mortgage industry in 2005, variable rate mortgages saved you more money than fixed rate mortgages 95 out of the past 100 years. First time home buyers were worried about what their home costs would be and avoided variable rate mortgages (VRM’s) because of the risk of rates going up higher than the fixed rate, but experienced home owners often took a VRM at mortgage renewal time.

However, in the past 5 years, most people have gravitated towards fixed rates because the gap between fixed and variable rates was small enough that the cost of uncertainty outweighed the potential reward for most borrowers.

Once again , the gap is widening. While fixed rate mortgages are going up due to the bond yield, variable rate mortgages have moved in the other direction.  Two years ago a VRM would be offered at Prime rate + .20%,  but later it reverted to Prime – .30% . In recent months, rates have dropped even further with some lenders offering Prime -1.0% !  You now have a choice between a 5-year fixed rate of 3.44-3.59% depending on the lender and a variable rate with a discount that calculates out to 2.45% . With a gap this large, it’s worth considering if you are risk tolerant enough to have a VRM.

Even if you are skittish, you can ask your Dominion Lending Centres mortgage broker to notify you if rates are going up and switch you to a fixed rate if they go above a certain percentage. Will your bank do that for you? I don’t think so. Be sure to have this discussion with your broker when your mortgage comes up for renewal or if you are considering a home purchase.

DAVID COOKE
Dominion Lending Centres – Accredited Mortgage Professional
https://dominionlending.ca/news/a-few-reasons-why-you-should-consider-a-variable-rate-mortgage/

There seems to be some confusion about what it actually means to co-sign on a mortgage… and any time there is there is confusion about mortgages, it’s time to chat with your trusted Dominion Lending Centres mortgage professional!

Let’s take a look at why you would want to have someone co-sign your mortgage and what you need to know before, during and after the co-signing process.

Qualifying for a mortgage is getting tougher, especially with the 2017 government regulations. If you have poor credit or don’t earn enough money to meet the banks requirements to get a mortgage, then getting someone to co-sign your mortgage may be your only option.

The ‘stress test’ rate is especially “stressful” for borrowers. As of Jan. 1, 2018 all homebuyers with over 20% down payment will need to qualify at the rate negotiated for their mortgage contract PLUS 2% OR 5.34% which ever is higher. If you have less than 20% down payment, you must purchase Mortgage Default Insurance and qualify at 5.34%. The stress test has decreased affordability, and most borrowers now qualify for 20% less home.

In the wise words of Mom’s & Dad’s of Canada… “if you can’t afford to buy a home now, then WAIT until you can!!” BUT… in some housing markets (Toronto & Vancouver), waiting it out could mean missing out, depending on how quickly property values are appreciating in the area.

If you don’t want to wait to buy a home, but don’t meet the guidelines set out by lenders and/or mortgage default insurers, then you’re going to have to start looking for alternatives to conventional mortgages, and co-signing could be the solution you are looking for.

In order to give borrowers, the best mortgage rates, Lenders want the best borrowers!! They want someone who will pay their mortgage on time as promised with no hassles.

If you can’t qualify for a mortgage with your current provable income (supported by 2 years of tax returns and a letter of employment) along with solid credit, your lender’s going to ask for a co-signer.

Ways to co-sign a mortgage

The first is for someone to co-sign your mortgage and become a co-borrower, the same as a spouse or anyone else who you are actually buying the home with. It’s basically adding the support of another person’s credit history and income to those initially on the application. The co-signer will be put on the title of the home and lenders will consider them equally responsible for the debt should the mortgage go into default.
Another way that co-signing can happen is by way of a guarantor. If a co-signer decides to become a guarantor, then they’re backing the loan and essentially vouching for the person getting the loan that they’re going to be good for it. The guarantor is going to be responsible for the loan should the borrower go into default.
Most lenders prefer a co-signer going on title, it’s easier for them to take action if there are problems.

More than one person can co-sign a mortgage and anyone can do so, although it’s typically it’s the parent(s) or a close relative of a borrower who steps up and is willing to put their neck, income and credit bureau on the line.

Ultimately, as long as the lender is satisfied that all parties meet the qualification requirements and can lessen the risk of their investment, they’re likely to approve it.

Before signing on the dotted line

Anyone that is willing to co-sign a mortgage must be fully vetted, just like the primary applicant. They will have to provide all the same documentation as the primary applicant. Being a co-signer makes you legally responsible for the mortgage, exactly the same as the primary applicant. Co-signers need to know that being on someone else’s mortgage will impact their borrowing capacity while they are on title for that mortgage. They’re allowing their name and all their information to be used in the process of a mortgage, which is going to affect their ability to borrow anything in the future.

If someone is a guarantor, then things can become even trickier the guarantor isn’t on title to the home. That means that even though they’re on the mortgage, they have no legal right to the home itself. If anything happens to the original borrower, where they die, or something happens, they’re not really on the title of that property but they’ve signed up for the loan. So they don’t have a lot of control which can be a scary thing.

In my opinion, it’s much better for a co-signer to be a co-borrower on the property, where you can actually be on title to the property and enjoy all of the legal rights afforded to you.

The Responsibilities of Being a Co-signer

Co-signing can really help someone out, but it’s also a big responsibility. When you co-sign for someone, you’re putting your name and credit on the line as security for the loan/mortgage.

If the person you co-sign for misses a payment, the lender or other creditor can come to you to get the money. The late payment would also show up on your credit report.

Because co-signing a loan has the potential to affect both your credit and finances, it’s extremely important to make sure you’re comfortable with the person you’re co-signing for. You both need to know what you’re getting into. I recommend looking into Independent Legal Advice between all co-borrowers.

Co-signing is NOT a life sentence Just because you need a co-signer to get a mortgage doesn’t mean that you will always need a co-signer.

In fact, as soon as you feel that you’re strong enough to qualify without your co-signer – you can ask your lender to reconsider your application and remove the co-signer from the title. It is a legal process so there will be a small cost associated with the process, but doing so will remove the co-signer from your loan (once you are able to qualify on your own), and release them from the responsibility of the mortgage.

Removing a co-signer technically counts as changing the mortgage, so you need to check with your mortgage broker and lender to ensure that the lender you choose doesn’t count removing a co-signer as breaking your mortgage, because there could be large penalties associated with doing so.

Co-signing is an option that could help a lot of people buy a home, especially first time home buyers who are typically starting their career and building their credit bureau.

A final mortgage tip: a couple of alternatives to co-signing that could help someone out:

• providing gift funds for a down payment
• paying off someone else’s debt, giving them more funds to pay the mortgage

KELLY HUDSON
Dominion Lending Centres – Accredited Mortgage Professional
https://dominionlending.ca/news/would-a-co-signer-enable-you-to-qualify-for-a-mortgage/

25-year amortization or 30 years? Insured or Uninsured? With an A Lender or B Lender? These are just a few of the questions people have to decide on when they are pursuing a mortgage. But the biggest question of all: Fixed Rate or Variable Rate?

With the instability of the market, and the Bank of Canada’s continuous rate hikes, many people now are flocking towards a fixed rate mortgage over a variable rate. What this means is that they are choosing to essentially “lock in” at a rate for the term of their mortgage (5 years, 10 years, 1 year…you name it). Now there are benefits to this…but there are also disadvantages too.

For example, did you know that 60% of people will break their mortgage by 36 months into a 5 year term? Whether it’s due to career changes, deciding to have kids, wanting to refinance, or another reason entirely, 60% of mortgage holders will break it.

And just like any other contract out there, if you break it, there is a penalty associated with it. However, there is a way to avoid paying more than is necessary. This applies directly to a fixed rate mortgage and we can help you decide what lenders you should go with.

If you have a FIXED RATE MORTGAGE:
There are two ways your penalty will be calculated.

Method #1. If you are funded by one of the Big 6 Banks (ex. Scotia, TD, etc.) or some Credit Unions, your penalty will be based on the bank of Canada Posted Rate (Posted Rate Method) To give you an example:

With this method, the Bank of Canada 5 year posted rate is used to calculate the penalty. Under this method, let’s assume that they were given a 2% discount at their bank thus giving us these numbers:

Bank of Canada Posted Rate for 5-year term: 5.59%
Bank Discount given: 2% (estimated amount given*)
Contract Rate: 3.59%

Exiting at the 2-year mark leaves 3 years left. For a 3-year term, the lenders posted rate. 3 year posted rate=3.69% less your discount of 2% gives you 1.44%. From there, the interest rate differential is calculated.

Contract Rate: 3.59%
LESS 3-year term rate MINUS discount given: 1.69%
IRD Difference = 1.9%
MULTIPLE that by 3 years (term remaining)
5.07% of your mortgage balance remaining. = 5.7%

For that mortgage $300,000 mortgage, that gives a penalty of $17,100. YIKES!

Now let’s look at the other method (one used by most monoline lenders)

Method #2:
This method uses the lender published rates, which are much more in tune with what you will see on lender websites (and are * generally * much more reasonable). Here is the breakdown using this method:

Rate when you initially signed: 3.24%
Published Rate: 3.34%
Time left on contract: 3 years

To calculate the IRD on the remaining term left in the mortgage, the broker would do as follows:

Rate when you initially signed: 3.24%
LESS Published Rate: 3.54%
=0.30% IRD
MULTIPLY that by 3 years (term remaining)
0.90% of your mortgage balance

That would mean that you would have a penalty of $2,700 on a $300,000 mortgage.

That’s a HUGE difference in numbers, just by choosing to go with a different lender! Knowing what you know about fixed rate mortgages now, let a Dominion Lending Centres Mortgage Broker help you make the RIGHT choice for your lender. We are here to help and guide you through the mortgage process from pre-approval onward!

GEOFF LEE
Dominion Lending Centres – Accredited Mortgage Professional
https://dominionlending.ca/news/fixed-rate-mortgage-what-lenders-you-should-do-it-with-and-why/