Top 3 Misconceptions About Reverse Mortgages

1. The Bank Owns Your Home.

2. Your Estate Can Owe More Than Your Home

3. The Best Time to take a Reverse Mortgage is at the End of Your Retirement

Let’s examine each misconception in more detail.

1. The Bank Owns Your Home.

Over 50% of Canadian homeowners over the age of 65, believe the bank owns your home once you’ve taken a reverse mortgage. Not true! We simply register our position on the title of the home, exactly the same as any other mortgage instrument, with the main difference in the flexibility of not having to make P&I payments on the reverse mortgage.

2. Your Estate Can Owe More Than Your Home

A reverse mortgage, unlike most traditional mortgages in Canada, is a non-recourse debt. Non-recourse means if a borrower defaults on the loan, the issuer can seize the home asset, but cannot seek any further compensation from the borrower - even if the collateral asset does not fully cover the full value of the loan. Therefore, when the last homeowner dies (and the reverse mortgage is due), the estate will never be responsible for paying back more than the fair market value of the home. The estate is fully protected – this is not the case for almost any other mortgage loan in Canada, which is  full recourse debt. So read the fine print the next time you offer to co-sign for a loan for mom!!

3. The Best Time to take a Reverse Mortgage is at the End of Your Retirement

This is a common mistake that reflects the “old-school” financial planning mentality.
For the majority of Canadians (without a nice government pension), the old school financial planning mentality is about cash-flow, and is as follows:

a) Begin drawing down non-taxable assets to supplement your retirement income.

b) Once your non-taxable assets are depleted, begin drawing down more of your registered assets (RSP/RIF) to supplement retirement income.

c) Once your registered assets are depleted, sell your home, downsize and re-invest to generate enough cash-flow to last you until you die.

The problem with the “old-school” financial planning model is two-fold:

1. 91% of Canadian seniors have no plans to sell their home (CBC News “Canadian Boomers Want To Stay In Their Homes As They Age).

2. You are missing out on a huge tax-saving opportunity by not taking out a reverse mortgage in the beginning of your retirement.

“Research has consistently shown that strategic uses of reverse mortgages can be used to improve a retiree’s financial situation, and that reverse mortgages generally provide more strategic benefits when used early in retirement as opposed to being used as a last resort.” - Jamie Hopkins, Forbes

In Canada, a reverse mortgage can be set-up to provide homeowners with a monthly draw  out of the approved amount. For example: client is approved for $240,000 and decides to take $1000/month. This is deposited into the clients’ bank account over the next 20-years. Interest accumulates only on the amount drawn (i.e.: not on the full $ amount at the onset).

This strategy allows clients to draw down less income from their registered assets to support their retirement lifestyle. In turn, this can create some excellent tax savings, since home equity is non-taxable. Imagine lowering your nominal tax bracket by 5 – 10% each and every year over a 20 year period?! The tax savings can be huge.  You are also able to preserve your investable assets, which historically, can generate a higher rate of return when invested over a greater period of time.

In summary, Canada and the U.S. both have aging populations and both have misconceptions about reverse mortgages. Learning about these misconceptions will allow you to offer your clients the best advice on how to balance retirement lifestyle and cash-flow, with the desire for retirees to age gracefully within their own homes. - by Roland Mackintosh, Business Development Manager, HomEquity Bank

Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects, Certified Reverse Mortgage Specialist (CRMS); Seniors Real Estate Specialist (SRES) and Accredited Buyer Representative (ABR) and retired, real estate broker with 30 years experience in residential real estate. Steven can be reached at 1-905-875-2582; steven.porter@mtgarc.ca or online at 1800Mortgages.ca

Could you benefit from someone co-signing your mortgage?

Qualifying for a mortgage is getting tougher, and if you have poor credit or are otherwise unable to meet a lender's requirements to get a mortgage, then getting someone to co-sign your mortgage could be the way to go.

If you can’t afford to buy a home or aren’t in a position to get the best mortgage rates and terms, then the conventional and conservative wisdom is to wait until you can afford to buy a home or take advantage of the best deals in the marketplace. In some housing markets, however, 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 any longer to buy a home but don’t meet the guidelines set out by lenders and mortgage insurers, then you’re going to have to start shopping for alternatives to conventional mortgages, and co-signing could be just the ticket for you.

Why you might need a co-signer?

You might remember moving out of your family home and looking for your first apartment. Maybe you just started your first full-time job and found the perfect place but without solid employment or credit history, a landlord wouldn’t rent a place to you unless you got someone to be a guarantor, a person who would essentially guarantee that they would pay the landlord if you were to stop paying your rent.

Co-signing a mortgage operates in much the same way; you’re not a strong enough applicant on your own and you need someone else who has a better track record to support your application. This can be because you have something negative on your credit report such as missed payments or a past bankruptcy, or because you just started a new job and are still on probation.

Rick Bossom, an accredited mortgage professional with Bayfield Mortgage Professionals in Courtenay, British Columbia, says that it’s an alternative to lenders just turning the deal down in cases where the borrowers are just on the edge of qualifying.

“It’s always going to be about the capacity and the quality of the borrower. The reason why a lender's going to ask for a co-signer is that the original borrower just isn’t strong enough,” he says. “They’re close but they just need a little bit more and that’s why the co-signing thing would come up. It’s not like they’re really, really bad, they’re just not quite there.”

And, as mortgage broker Jackie Woodward writes, “A suitable co-signer has to look good where the main borrower doesn’t.” In other words, if the primary applicant has weak credit, then the co-signer’s credit has to be strong. If the primary applicant’s soft spot is their debt or income, then the co-signer has to be strong in those areas.

Ways to co-sign a mortgage

Co-signing can play out in a couple of ways. 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.

More than one person can co-sign a mortgage and anyone can do so, although it’s usually the parent(s) or a close relative of a borrower who steps up and is willing to put their neck on the line. Lenders also tend to look more favourably on family members as opposed to a (seemingly) random person who is co-signing. Ultimately, however, 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

One thing that Bossom says surprises both primary applicants and co-signers is the amount of information that’s requested from co-signers. It's a complete vetting process because there are a number of things that can go wrong if things go south for the borrower, and as mentioned, being a co-signer makes someone responsible for the mortgage, the same as the primary applicant.

This could be a scary thing for an older parent who is close to retirement, or have their own plans on what to do with their money. Being a co-signer will impact their own ability to borrow money, which could be an issue if they decide that they want to renovate their home, get a car, or take out any other type of loan. And even if the primary applicant doesn’t go into default, if they ever get behind on their mortgage payment, then the credit of the co-signer could be affected. Even though being a co-signer isn’t meant to last for the life of the mortgage, and often not even the full length of the current mortgage term, co-signers should know that being on someone else’s mortgage will temporarily impact their borrowing capacity.

“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,” Bossom says. “They have to know that for the time they’re going to be a co-borrower, they could be adversely affected.”

If someone is a guarantor, then things can become even trickier because the person 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,” Bossom says. “That’s a very scary thing.”

For this reason, he says, 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.

In most cases, a co-signer is a bit older and more established, and the amount of required information could prove problematic if the co-signers themselves aren’t able to qualify for the mortgage for whatever reason. For example, the co-signers may own their home outright so have very little debt, but may be retired so have a limited income. Or there might be an issue if the borrower(s) need mortgage insurance through Canada Mortgage and Housing Corporation (CMHC), and the co-signer already has a mortgage that’s insured by CMHC, because CMHC limits the availability of their homeowner mortgage loan insurance to only one property per borrower/co-borrower at any given time (although there are other mortgage insurers available if the lender is willing to use one of the alternatives).

Co-signing isn’t something to be taken lightly, and even if the relationship is that of a parent/child, it may be worth looking into a formal legal agreement between all co-borrowers to clarify that the primary applicants are the ones living in the home and responsible for making the mortgage payments.

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 – whether that period of time is two years or two weeks – you can ask your lender to reconsider the application and remove the co-signer from the title.

It is a legal process so there will be a relatively small cost associated with the process, but doing so will remove the co-signer from your loan, and release them from the responsibility of backing what is, for most people, a rather large amount of money. Removing a co-signer technically counts as changing the mortgage, so you’ll have to check with your mortgage broker and lender to ensure that it doesn’t count as breaking your mortgage and that there is no additional cost associated with doing so.

Co-signing isn’t the norm but it’s an option that could provide a lot of people with a little leg up onto the property ladder. - whichmortgage.ca

Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects, Certified Reverse Mortgage Specialist (CRMS); Seniors Real Estate Specialist (SRES) and Accredited Buyer Representative (ABR) and retired, real estate broker with 31+ years experience in residential real estate. Steven can be reached at 1-905-875-2582; steven.porter@mtgarc.ca or online at 1800Mortgages.ca