BY TERRENCE BELFORD, CANWEST NEWS SERVICE MARCH 31, 2010 11:43 AM
Inge and Ben Hahn, of Orrville, Ont., are on 'cloud nine' after arranging a reverse mortgage on their property.
Inge Hahn can hardly contain her relief and excitement. After years of worrying about the rising cost of living and diminishing pension income, the 72-year-old and her 73-year-old husband now have a large chunk of cash to see them through.
In January, the pair obtained a reverse mortgage on their Orrville, Ont., home. It took just three weeks from the day she made that initial call to Home Equity Bank, the only source of reverse mortgages in Canada, until she had a cheque for $143,000 in her hands.
It represented 40% of the equity she and her husband Ben had built in their lakefront home, but at an interest rate of just 3.75% she figures rising house prices are likely to more than make up for any loss of equity by the time she and Ben die or have to move.
Unlike with a bank loan or mortgage, she faced no monthly payments. The interest and principal just add up year after year and only come due when they no longer occupy the home.
"I am on cloud nine," she says. "You can't imagine what a relief this is for us. Our pension income just did not cover the bills anymore. Now we can do all the things that need doing and have money left over to invest and provide extra income."
The Hahns are one of 7,000 customers who have gone to the Home Equity Bank since it started as the Canadian Home Income Plan (CHIP) in 1986, says Greg Bandler, vice-president of sales and marketing. Currently the bank holds more than $1-billion in reverse mortgages.
"And business is booming," Mr. Bandler says. "One of the chief reasons is that since we became a schedule 1 bank on Oct. 13 last year we have been able to reduce the interest rates we charge considerably. We are now competitive with conventional mortgages.
"The second is that because of the recession and historic low returns on investments, many Canadians are finding their pension income is just not what they need. To make it go further they are tapping into their equity of their homes."
Becoming a bank and having access to inexpensive money to fund reverse mortgages-- mainly through the sale of guaranteed investment certificates, which it sells through 50 other banks and institutions -- has made the CHIP program a reasonable alternative for seniors, say mortgage brokers across the country.
"I never saw the value of them in the past," says John Panagakos of The Mortgage Centre in Toronto. "In the past the rates charged have been extremely high but now that they have come down, I may have to reconsider them."
"I can see how they may make sense for some people now that rates are competitive," says Ajay Soni, senior broker with mortgage lender Invis in Vancouver. "But I still don't see them as a mainstream option for most seniors."
The sweet spot for Home Equity Bank seems to be seniors aged 72 or 73, Mr. Bandler says. "They have rolled their RRSPs into RIFs and found the income generated is short of what they need to live and pay normal bills," he says. "They come to us because this is tax-free money and can be used to provide that much needed retirement income."
The Hahns fall directly into that group. Their past financial challenges were not for lack of prudence or planning, Mrs. Hahn says.
"I was a vice-president at Dun & Bradstreet and my husband was a printer. We made sure that 10% of everything we earned went into saving for retirement. We bought this house 21 years ago as part of our retirement planning. A lovely home on a lovely lake in the cottage country we so enjoyed.
"We lived frugally, we never travelled. We watched every penny."
But then the bills started piling up. "Property taxes are up 37% in the past few years because we have lake frontage," she says. "The house is 21 years old. It needs new windows, a new roof and work done on the basement.
"I started driving around to see if we could find a smaller, less-expensive home but there just was not anything available."
Then she saw a television ad for the CHIP reverse mortgage and gave Home Equity Bank a call.
"They were so nice. They explained everything and told me what I had to do. I paid $275 for an independent appraisal, which showed our home was valued at $375,000, and they offered a loan for 40% of the equity at 3.75%."
The CHIP plan is available to any homeowner aged 60 and over, Bandler says. They can borrow up to 40% of the equity in a home and not face repayment until they die, sell or move.
"Say on a $300,000 home, you want to borrow $100,000 by way of example," Bandler says. "After 15 years at 3.75% you would owe $174,000. At the same time, using the annual price increase of homes reported by the Canadian Real Estate Association, the price of that home would have increased to $632,000. When it came time to sell you would still have 72% of your equity in the home."
Ms. Hahn says she and her husband have yet to decide what to do with all the money.
"All I can say is that it has come as a sort of wonderful windfall," she says.
Reverse Mortgages (CLIP Loans)a brief outline
What is a reverse mortgage?
In a nutshell, a reverse mortgage is a loan against your home that does not involve a monthly payment. It is paid back when the mortgagor either sells, dies or moves (with no penalty in any of these 3 scenarios).
Who qualifies for this type of loan?
Anybody aged 60 or greater who owns their home is eligible. Yes, both partners need to be at least 60 years old. There is some discretion given if your age is close.
What can the funds be used for?
Funds can be used for any common sense borrowing reason.
What will it cost me?
Legal fees and appraisal fees.You will need to discuss the paperwork with your independent legal advisor, just like any other mortgage.If you can not afford these items and you qualify for the deal, the lender may, at it’s own discretion, pay these up front and have them come out of your proceeds.If the borrower backs out of the deal and the fees have been paid by the lender, they would need to be repaid by the borrower.
How much can I borrow?
There are different factors that affect the amount you can borrow.The type of property, the location of the property, the condition of your property and your age.
In the best case scenario, in a major population centre, in a single family home, in good repair and if your age is 75, you might qualify for about 40% of the value of your home(i.e. if your home appraised at $300,000 you might be eligible for up to $120,000).
Why would I need a reverse mortgage?
Many reasons, but perhaps the largest is that fact that many boomers do no have enough liquid capital (cash savings RRSPs, pension plans, etc) saved up and instead have focused on paying off their home as their only real asset.Now they are property rich and capital broke.
A house purchased in 1979 for $50,000 might now be worth $300,000 with a small mortgage or no remaining mortgage.
Taxes, perscriptions and utility costs are forcing you to cut back on your groceries, so you are seriously looking at downgrading. You don’t really want to move, but you are on a fixed income…what are your options?
Where can I get my questions answered?
Mike Toporowsky AMP, the mortgage broker at Real Mortgage Solutions, is ready to help you find the answers.Real Mortgage Solutions is a registered Reverse Mortgage referral provider and as such Real Mortgage Solutions does not charge you a fee for services.
Some interesting points about Reverse Mortgages.
- Credit score, income and health are not going to affect the reverse mortgage application
- If you downsize and sell your existing property, there is a way to move your reverse mortgage to your new property.
- You can use the funds to buy a vacation cottage andeither use it or rent it out to get additional income.
- banks are a large referral source for reverse mortgage customers
- Interest rates are based on terms and you select from the offered rates and terms, just like a regular mortgage. Rates are about the same as bank posted rates.
- If you live to 115 years old, you should never have to worry about loosing your home to a reverse mortgage (If you maintain your other bills like Utilities, taxes, condo fees and insurance.Reverse mortgages have been around for 26 years and have a sterling track record.
-You still pay your own property taxes, insurance, utilities and condo fees (if applicable). This is the an area of concern for reverse mortgage lenders and they need you to maintain your monthly responsibilities.
- You can increase your loan at the time of renewal if your property value has increased.
- Areas outside of major centres have a slightly lower percentage that can be advanced, but nothing significant.
-Homes that are condos or rural farm homes (retired farmers) are still eligible for reverse mortgages.
-minimum loan is $20,000
- There would be a penalty to pay out your reverse mortgage in the first 3 years and it reduces after 3 years.
-Reverse mortgages must be the first mortgage, so any prior mortgage must be paid off by the proceeds of this new reverse mortgage.You can take out a second mortgage with another lender, if you need to.
Think about this point.
(For example) You have a home worth $300,000 and a remaining mortgage of $90,000 with payments of $650 /month.Even if you qualify to get 33% of the value, you would have no bank mortgage payments and an additional $10,000 in your pocket.Imagine having no more mortgage payment and you can comfortably live in your home that you worked so hard for all your life.
This program is not for everybody, but it is a beautiful program for those who need it.
