In the land of aspirational retirement, gently wrinkled folk spend their Third Age golfing, cruising and doing yoga on the beach.
Back in the real world, however, many people are too busy worrying about their meagre pensions and the miniscule interest rates on their savings. Couple that with high household debt and a rising life expectancy and it’s obvious that for many, a cozy and stress-free retirement is as likely as a George Clooney wedding.
In fact, the closest thing many retirees have to a pot of gold is their home. With a homeowner rate of 69 per cent in Canada, no wonder many people are looking for a way to use the equity accumulated in their dwellings to provide an income for their retirement. One option available is the reverse mortgage.
The reverse mortgage arrived in Canada in 1986 via the Canadian Home Income Plan (CHIP) Corporation. Today, CHIP is administered by Home Equity Bank (HEB), the main provider of reverse mortgages in the country. Only homeowners aged 55-plus are eligible for the product, which allows them to borrow up to 50 per cent of the value of their home as a lump sum, in monthly payments or in a mix of both. The principal or interest doesn’t have to be repaid until the house is sold, the borrowers move out or they die. In the case of the latter, their heirs become responsible for the loan.
“Flexibility is probably the biggest change we’ve made in the product but the core of it is still the same, says Steven Ranson, CEO of HEB. “You can stay in your home as long as you want, you never have to make a payment and what you owe is limited to the value of the house.”
The ABCs of reverse mortgages
HEB sells the product directly and has referral deals with 32 credit unions coast to coast as well as with the Big Five banks, major brokerage houses and financial planning firms. The product comes with options including variable rates and six-month, one-, three- and five-year terms. Ranson says older seniors are the ones most likely to qualify for a greater percentage of their home’s value, while younger seniors might get a smaller share. The average is about 26 per cent. Only those 80 or older can generally command the headline-grabbing 50 per cent.
“You or the estate sell the house, you pay us back and you keep what’s left,” says Ranson. “And for most people what’s left is a lot. It is 50 per cent of the equity.”
Reverse mortgages have grown in popularity in recent times, he says. “People still tend to retire around 65,” he explains. “After six or seven years, particularly now when GIC rates are so low, it’s hard for their savings to generate as much income as they might have thought. They also find that inflation starts to eat into their income a bit more. They are on this fixed income and there are still things they would like to do.”
The downside of an appealing proposition
The main advantage of the reverse mortgage is that the loan provides a regular source of income for cash-strapped retirees. But a number of drawbacks make many financial experts wary.
Financial advisor Kathryn Jankowski, author of the Financial Smarts blog and a vice president at T.E. Wealth in Toronto, tells clients tempted by a reverse mortgage to think twice. “You might want that comfort of staying in that home with the reverse mortgage but then you’re going to compromise your ability to care for yourself afterwards,” she says. “You need to look at the immediate as well as future possibilities. Just the cost of care for the elderly is exorbitant (see “Quality-of-life insurance”). If a client in their 70s is looking at a reverse mortgage, I would say what’s going to happen to you in your 80s if you take the equity out of your home now?”
“If a client in their 70s is looking at a reverse mortgage, I would say what’s going to happen to you in your 80s if you take the equity out of your home now?”
—Kathryn Jankowski, author of the Financial Smarts blog and VP at T.E. Wealth in Toronto
As well as losing some of that equity, there’s the issue of compounding interest, and the fees which can make the product a lot more expensive than a regular mortgage or line of credit. As well as the appraisal fees and HEB’s legal, closing and administration costs (up to nearly $2,000 depending on the mortgage), the bank insists clients get independent legal advice – not something mandated for a standard mortgage. The interest rates are also around two per cent above prime. The current interest rate on a five-year term is 5.79 per cent.
“I would look at other options like renting,” Jankowski says. “Could [homeowners] downsize or maybe move to a more rural community where you can get more home for your dollar? Some of my clients who retire and really don’t have enough money to live on, end up moving into homes with their siblings or moving into homes with their parents again because their parents need the care and have a good pension plan and can afford to stay in their home.”
Examining the options
While some credit unions refer members to CHIPs, none have their own reverse mortgages. Cataract Savings and Credit Union used to offer a reverse mortgage before it merged with PenFinancial Credit Union ($347 million assets under management; 15,000 members) in Niagara Falls, Ontario. That product was adapted to create the Designer Mortgage, which mimics some of the traditional features of a reverse mortgage, with an interest capitalization option that can provide an income stream.
“A traditional feature of a reverse mortgage is that it is quite complicated. It can be more expensive and perhaps even limiting in terms of the loan to values that they can extend to,” says Rhonda Maver, PenFinancial’s member service manager. “Our Designer Mortgage is far less complicated. It’s available to everyone from young couples and seniors with 20 per cent equity in the house, and we will go up to a 60 per cent loan-to-value with certain limitations.”
With the Designer Mortgage, lines of credit and mortgage advances are established up front, with no extra administration fees.
There’s also the Home Equity Line of Credit (HELOC), which gives members the option to borrow at premium interest rates using the equity in their house as security. “The Home Equity Line of Credit (HELOC) is based on the assessed value of your home,” explains Ian Thomas, vice president of retail services at Coast Capital Savings Credit Union in B.C. ($14.6 billion in assets; 504,000 members). “At Coast we can go up to 65 per cent of that assessed value. Once that amount has been established the member has the ability to access those funds at any time. They will only be paying interest on the funds that they access. They have flexible repayment terms – pay any amount at any time without penalty and the established limit is not changed as the money is repaid. Even as they repay they will have further access to those funds again. Repayment terms are on an interest only basis.”
While HELOCs may have better rates and generally don’t require additional fees, they are still out of reach for the broke but house-proud senior, says HEB’s Steve Ranson. He says; “People like our product [because] they are never going to be making a payment, so they don’t worry about a change in their financial circumstances. They are not worrying about the whole payment obligation that comes with a HELOC. We tend to think of HELOCs as a much more of a short-term product for clients in [that] age group. We are much more of a longer-term option.”
Rebecca Awram, the seniors’ specialist at Origin Mortgages in Vancouver, agrees that reverse mortgages offer a serious option for retirees surviving on extremely limited means.
“I find mainstream media and financial planners are often rather hostile to reverse mortgages. Why? Because they are more likely to be thinking about or dealing with seniors who actually have some money – investments and savings, credit ratings and maybe even company pensions. They see reverse mortgages as a really poor idea, and for that demographic of seniors, it is.
“Why would they want to go and borrow money with a premium interest rate, a compounding interest product when they qualify for a small line of credit at market rates and can afford interest-only payments?”
“Most seniors who come to me are house rich and cash poor”
—Rebecca Awram, seniors’ specialist at Origin Mortgages
However for those seniors whose only option is to max out their credit cards or service new debt, why shouldn’t they exploit their most valuable asset, says Awram, who offers products including equity loans and lines of credit, as well as CHIP. “Most seniors who come to me are house rich and cash poor,” she says. “Before the recession, you could often get people in that situation an equity product at market rates. Unfortunately, the post-recession lending landscape is that there are very, very few true equity products available on the market at best market rates. All of that said, I will do everything possible to see if a senior qualifies for something else.”
Meanwhile, HEB has seen an uptick in their fortunes. It has $1.5 billion in outstanding mortgages and is enjoying 10 to 20 per cent growth per annum. It’s ethical to advise sound, long-term financial planning and offer products that reward thrift. Still, maybe it’s time for credit unions to take a harder look at reverse mortgages as a way to help members with few alternatives. As house prices rise, the retirement community booms, personal debt accumulates and people fail to contribute to RRSPs, more seniors will be in need of choices. Are credit unions ready to step up to help those using the only asset they have left? ◊