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Reverse Mortgage vs LOC for aging parents or in-laws

Thomas Beyer

Thomas Beyer

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Aug 30, 2007
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Researching reverse mortgages I realize they are rather convenient as you do not have to pay any interest until death, or house/condo is sold. However, interest rates appear rather high today, around 6%, vs a more typical prime plus 1/2% to prime plus 1% secured LOC.

Who has done this for their parents, or grandparents or in-laws? Any experiences you’d like to share re process, timelines, pro’s and con’s of a reverse mortgage vs LOC ?
 
Reverse mortgages are a great financing tool and can be very attractive for some.

PROS:
  • As long as there is plenty of equity in your home, you can qualify without traditional income verification requirements for a pretty large mortgage amount. This means that someone with a $1MM home who couldn’t otherwise obtain a mortgage, can access up to $800,000 without any income. These funds are received as a lump sum, OR can be paid out monthly/on a frequent basis.
  • No payments at all as interest is added to the mortgage balance - this is very attractive cash-flow wise.
  • You can take out a large lump sum OR take out funds as needed.

CONS:
  • Interest costs would be higher as you’d imagine in a solution like this. Typically high 5% range, BUT you are also not having to make ANY payments and can access funds without income.
  • If applicant passes away then this loan needs to be paid out within a few months. This could mean you have to sell home OR obtain financing with another lender.

As with anything, pros/cons need to be weighted to see if this is a solution that makes sense. Note that if applicant can qualify for a HELOC on their property, which would provide them with better rates AND they are ok with repayments, then of course that would be a more ideal solution. For applicants who just don’t meet those requirements, especially in current “Stress Test” environment, this is an attractive solution.
 
Vine Group said:
Reverse mortgages are a great financing tool and can be very attractive for some.

PROS:
  • As long as there is plenty of equity in your home, you can qualify without traditional income verification requirements for a pretty large mortgage amount. This means that someone with a $1MM home who couldn’t otherwise obtain a mortgage, can access up to $800,000 without any income. These funds are received as a lump sum, OR can be paid out monthly/on a frequent basis.
  • No payments at all as interest is added to the mortgage balance - this is very attractive cash-flow wise.
  • You can take out a large lump sum OR take out funds as needed.

CONS:
  • Interest costs would be higher as you’d imagine in a solution like this. Typically high 5% range, BUT you are also not having to make ANY payments and can access funds without income.
  • If applicant passes away then this loan needs to be paid out within a few months. This could mean you have to sell home OR obtain financing with another lender.

As with anything, pros/cons need to be weighted to see if this is a solution that makes sense. Note that if applicant can qualify for a HELOC on their property, which would provide them with better rates AND they are ok with repayments, then of course that would be a more ideal solution. For applicants who just don’t meet those requirements, especially in current “Stress Test” environment, this is an attractive solution.
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Thanks.

What firms, besides CHIP, offer reverse mortgages ?

Why are interest rates higher if total loan to value incl interest payments is well below a comfortable margin ?
 
CHIP is the only one offering this in Canada (as far as we know).

Lenders offer financing primarily based on risk, ability to repay the loan and assets. CHIP is taking a much higher risk here because there are NO REPAYMENTS on the loan. In fact, they only make money when property is sold because there are no ongoing payments to the lender. Risk is much higher here for the lender, so the rate must be at a premium.

The rate is quite reasonable if you think about it. There are no other financing solutions that provide funds WITHOUT repayment and any income qualification (unless borrowing from family/friends), so the rate is priced accordingly.

As a comparison, private money does not normally require income, BUT rates are 8%+ and fees with repayments are required.

CHIP fills a need, but it is not for everyone. However, it is still a very good solution for those who need it.
 
My opinion on reverse mortgages is they are a borderline scam similar to a payday loan. With the fees charged and interest compounded it is almost assured there is no equity left when you pass away. A better option would be to sell, rent, and invest the rest into something else. I don't know anyone personally who has actually done this do you?
 
If you were to borrow $200,000 over 10 years on a reverse mortgage you would pay roughly 232% more interest then if you had a conventional mortgage and this is using the same rate of 4.5% for both.
Because there are no monthly payments to reduce the principal balance on the mortgage the interest compounded only adds to the full balance you're charged interest on. This quickly leads to excessive loss of equity in the home.
This type of lending I personally consider predatory, it targets the elderly, has confusing terms and disregards the borrowers ability to make monthly payments. Preying on the financially strained elderly individual they present it as a saving grace when actually they do not want you to make monthly payments so they can reap bigger profits.

EDIT: to comment on your question why the rates are higher for a home equity conversion mortgage (reverse mortgage). When you're the only game in town and your clients are in a no win situation you can set the rates at whatever you like.
 
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David Wilson said:
If you were to borrow $200,000 over 10 years on a reverse mortgage you would pay roughly 232% more interest then if you had a conventional mortgage and this is using the same rate of 4.5% for both.
Because there are no monthly payments to reduce the principal balance on the mortgage the interest compounded only adds to the full balance you're charged interest on. This quickly leads to excessive loss of equity in the home.
This type of lending I personally consider predatory, it targets the elderly, has confusing terms and disregards the borrowers ability to make monthly payments. Preying on the financially strained elderly individual they present it as a saving grace when actually they do not want you to make monthly payments so they can reap bigger profits.

EDIT: to comment on your question why the rates are higher for a home equity conversion mortgage (reverse mortgage). When you're the only game in town and your clients are in a no win situation you can set the rates at whatever you like.
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Well said.

An LOC generally cheaper but the LOC, unlike a ( normal or reverse ) mortgage, can be called at any time. Unlikely, but it can be called.

So you pay a premium for certainty and convenience.

Assuming low income what would a typical bank lend as a mortgage or LOC for an 80+ year old couple in a $1M asset ? $300,000 ?
 
CorySperle said:
My opinion on reverse mortgages is they are a borderline scam similar to a payday loan. With the fees charged and interest compounded it is almost assured there is no equity left when you pass away. A better option would be to sell, rent, and invest the rest into something else. I don't know anyone personally who has actually done this do you?
Click to expand...

Let’s assume selling and renting the same or another asset not desired due to age induced stress and uncertainties, then what?
 
The problem with conventional bank underwriting is they have hard fast rules with next to no flexibility. So in answer too you're question I would say the couple would need to qualify per normal standards and income will likely dictate the amount of funds they could get, assuming all else is good. Banks do not lend solely based on collateral, you often need to go to the subprime market to find that and it always comes at a huge premium. The elderly are not in a good place as far as financing goes, unless they have the income to support their lifestyle. This often means that elderly people that require assistance go without it as they just don't qualify.

From the lenders stand point, no one wants to lend a wack of money to an elderly person IF they don't have the income to support the debt. Otherwise family members would be crying predatory lending left right and center (and rightly so). In point of fact I've had this conversation multiple times with family of elderly people that DID qualify per normal standards. You can not discriminate by age so if someone qualifies and is of sound mind you're obligated to lend to them (by this I mean you can't use age to reject them) but it's still a PR nightmare an d typically rough to deal with when they past away.

There is a lack of support for our aging population, financial products are not designed with them in mind. The one that is (reverse mortgage) is currently more of an cash grab that exploits rather then a truly helpful product. This could be potentially fixed with some government backing lenders to bring lender risk down and lower rates. Unfortunately I believe you will see the reverse mortgage happen a lot more as it becomes more popular (I just saw the TV commercial a few mins. ago.) With Canadians spending $1.68 for every dollar they make many people have problems retiring. There is a need for regulation on the lending industry outside of the banks. However, the government seems to be a lot more reactionary then proactive here. Payday loans got addressed because of the massive out cry that came from consumers and the Regulation Hammer hit them in the face. You'll read more stories about elderly people loosing homes (due to tax arrears or loss of fire insurance) or loved ones dealing with this massive mess after they have passed on. Reverse mortgages may become the next major outcry from the public but it will likely take quite awhile for that to happen as is the nature of the product.
 
David Wilson said:
The problem with conventional bank underwriting is they have hard fast rules with next to no flexibility. So in answer too you're question I would say the couple would need to qualify per normal standards and income will likely dictate the amount of funds they could get, assuming all else is good. Banks do not lend solely based on collateral, you often need to go to the subprime market to find that and it always comes at a huge premium. The elderly are not in a good place as far as financing goes, unless they have the income to support their lifestyle. This often means that elderly people that require assistance go without it as they just don't qualify.

From the lenders stand point, no one wants to lend a wack of money to an elderly person IF they don't have the income to support the debt. Otherwise family members would be crying predatory lending left right and center (and rightly so). In point of fact I've had this conversation multiple times with family of elderly people that DID qualify per normal standards. You can not discriminate by age so if someone qualifies and is of sound mind you're obligated to lend to them (by this I mean you can't use age to reject them) but it's still a PR nightmare an d typically rough to deal with when they past away.

There is a lack of support for our aging population, financial products are not designed with them in mind. The one that is (reverse mortgage) is currently more of an cash grab that exploits rather then a truly helpful product. This could be potentially fixed with some government backing lenders to bring lender risk down and lower rates. Unfortunately I believe you will see the reverse mortgage happen a lot more as it becomes more popular (I just saw the TV commercial a few mins. ago.) With Canadians spending $1.68 for every dollar they make many people have problems retiring. There is a need for regulation on the lending industry outside of the banks. However, the government seems to be a lot more reactionary then proactive here. Payday loans got addressed because of the massive out cry that came from consumers and the Regulation Hammer hit them in the face. You'll read more stories about elderly people loosing homes (due to tax arrears or loss of fire insurance) or loved ones dealing with this massive mess after they have passed on. Reverse mortgages may become the next major outcry from the public but it will likely take quite awhile for that to happen as is the nature of the product.
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Good points.

Indeed I am surprised that none of the major banks offer a reverse mortgage as part of their portfolio. None. Why not?
 
The issue on the banking side of things is that the profit is deferred too far into the future and the risk involved is a too high. If the banks did a reverse mortgage for 10 years that's 10 years of unknown market appreciation or depreciation on the value of the house. A whole lot of things can happen in that time frame that the banks just would not risk it, Shareholders would riot. So I highly doubt you'll see banks pick up the reverse mortgage (in its current form anyway). The banks could lend that money out and be collecting interest right away, so why would they defer 100% of their profit to a later date.

There is a need for something like a reverse mortgage but in its current form it is just too much of a gamble to introduce much competition into the market. There is a reason there are not a lot of companies offering this, think of the capital investment required with no returns for years. If someone was trying to borrow from you, would you invest? "I would like 200,000 from you today and I won't make a payment for who knows how long and you can have it all back + interest when I'm dead or the house sells" too much risk there.

If the government stepped in to back the reverse mortgages it would reduce the risk and thus it would follow that the rates would drop and it would be less expensive. There is still the issue of instant returns vs. deferred returns just too many other things to put money into that offer faster and better returns.

Interest only LOC is a much better option here, at least with this the balance should not increase and there is still a good degree of flexibility. Lowest payment you're going to get, you won't have any principal reduction but you won't loose a ton of equity to interest.
 
I helped a senior relative set up a Heloc with Manulife Bank.
Person was 80 yrs old. Manu would allow them to access up to 50% of the homes equity if needed.
Cpp, Oas and a very small pension was used to verify income. No other debt in this case. Any monies borrowed could be left unpaid, but would compound at 3% per yr. I think it’s up to 3.5 % now as it’s a floating rate. The debt could also be locked in for a specified term. So far, none of the money has been accessed as it was set up to be available for a real emergency.
The loan is callable, but would only be called for nonpayment, and in the event of death, in which case the beneficiary would need to qualify, pay out the loan or refi. Seemed simple and straightforward.


Sent from my iPhone using myREINspace
 
David Wilson said:
.. defer 100% of their profit to a later date.

There is a need for something like a reverse mortgage but in its current form it is just too much of a gamble ... too much risk there.

It.
Click to expand...

High risk in a 30-50% LTV scenario?
Defer profits if interest of say 5% is accrued annually?
Gamble ?
 
dpeacock said:
I helped a senior relative set up a Heloc with Manulife Bank.
Person was 80 yrs old. Manu would allow them to access up to 50% of the homes equity if needed.
Cpp, Oas and a very small pension was used to verify income. No other debt in this case. Any monies borrowed could be left unpaid, but would compound at 3% per yr. I think it’s up to 3.5 % now as it’s a floating rate. The debt could also be locked in for a specified term. So far, none of the money has been accessed as it was set up to be available for a real emergency.
The loan is callable, but would only be called for nonpayment, and in the event of death, in which case the beneficiary would need to qualify, pay out the loan or refi. Seemed simple and straightforward.


Sent from my iPhone using myREINspace
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Manulife. Now I leaned sth.

Thank you very much !
 
ThomasBeyer said:
High risk in a 30-50% LTV scenario?
Defer profits if interest of say 5% is accrued annually?
Gamble ?
Click to expand...

The time factor is the major risk regardless of LTV. A lot of items could go wrong during the time frame. Not to mention wear and tear This is More along the lines of what a settlement company does only with more risk. Unknown = risk

It’s not just the rates it’s the opportunity costs of the funds and the drop in Profits (due to the lag in realizing the profits) which will make shareholders uneasy so 5% wouldn’t come anywhere near enough. Especially with how the banking system works deposits create loans which create deposits and so on. There is no reserve rate in Canada.

Gamble for sure anything that is not guaranteed is a Gamble, some are just bigger then others and people have a different tolerance or comfort levels when it comes to uncertainty. In this case your hoping the housing market won’t crash, the owners will maintain sufficient fire insurance, that if there is a fire the insurance company will pay, the house stays in a state of good repair and the like. I have personally seen all manner of bizarre situations when it comes to houses, holes the size of a car in the floor, one owner burnt his house to the ground after a fight with his wife and insurance refused the claim, another one removed the entire roof to add on a 2nd story and run out of money half way through and just walked away leaving it like that. Among many others I have seen.
 
David Wilson said:
The time factor is the major risk regardless of LTV. A lot of items could go wrong during the time frame. Not to mention wear and tear This is More along the lines of what a settlement company does only with more risk. Unknown = risk

It’s not just the rates it’s the opportunity costs of the funds and the drop in Profits (due to the lag in realizing the profits) which will make shareholders uneasy so 5% wouldn’t come anywhere near enough. Especially with how the banking system works deposits create loans which create deposits and so on. There is no reserve rate in Canada.

Gamble for sure anything that is not guaranteed is a Gamble, some are just bigger then others and people have a different tolerance or comfort levels when it comes to uncertainty. In this case your hoping the housing market won’t crash, the owners will maintain sufficient fire insurance, that if there is a fire the insurance company will pay, the house stays in a state of good repair and the like. I have personally seen all manner of bizarre situations when it comes to houses, holes the size of a car in the floor, one owner burnt his house to the ground after a fight with his wife and insurance refused the claim, another one removed the entire roof to add on a 2nd story and run out of money half way through and just walked away leaving it like that. Among many others I have seen.
Click to expand...

CMHC could insure the bank and LTV lower if borrower younger. As such, low risk. Compensated by higher rates than normal mortgage.

I’d say with an aging population we need far more choices for our parents / grandparents / seniors in general !!

But LOC or Manulife combined LOC & chequing account an option to explore further.
 
ThomasBeyer said:
CMHC could insure the bank and LTV lower if borrower younger. As such, low risk. Compensated by higher rates than normal mortgage.

I’d say with an aging population we need far more choices for our parents / grandparents / seniors in general !!

But LOC or Manulife combined LOC & chequing account an option to explore further.
Click to expand...

Completely agree with you.


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