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REVERSE MORTGAGES – NO, WE DON’T WANT YOUR HOME!

Your Parents Owe $500,000 to CRA…Can a Reverse Mortgage Help?Reverse Mortgages have had their share of misconceptions. In fact, we are often approached with false assumptions and unfounded facts about the product that steer the public to think of the product in a negative light. This article will cover one of the most common myths and the real facts behind this myth that has long been misinterpreted.

Myth: One of most common misconceptions that we hear time and time again is that you will lose ownership of your home to us.

Fact: This statement is false. HomEquity Bank, the provider of the CHIP Reverse Mortgage has taken several measures that ensure the protection of your equity.

1) Retain ownership of your home: Just like with any other mortgage, your home is used to secure the loan, which means that HomEquity Bank is registered as a standard charge on title. You, as a customer DO NOT transfer ownership of your home to us. In fact, once it’s time to pay back the mortgage you or your heirs have the choice to settle the loan however you or they want. Selling the home is the most common option, but it is not mandatory.

2) Our conservative lending practices: In our ads and on our website, we remind the customers that they can get up to 55% of the value of their home in a reverse mortgage loan. Of course, this amount does depend on the borrower(s) age, their property type as well as the location of their home. But as a rule of thumb, the younger the borrower is, the less they will qualify for and the older the borrower is, the more they will qualify for. This is because we want to make sure that the borrowers reverse mortgage loan doesn’t exceed the value of their home.

3) The potential value appreciation of your home: Many people don’t realize that their home may appreciate in value, however the interest that accrues only accumulates on the small borrowed amount of the home. That is why we say in our marketing pieces that “99% of homeowners have money left over” when their loan is settled.

This graph illustrates how the interest is affected when a home appreciates in value. For illustration purposes, we have used 3%, a modest level of home appreciation, which allows for equity preservation after a borrower takes out a CHIP Reverse Mortgage for 15 years. This example illustrates the following:

  • Home appraised at $500,000.
  • Homeowner(s) qualify for $200,000 (40%) of the value of their home in a CHIP Reverse Mortgage.
  • The homeowner(s) take the CHIP loan for 15 years before they move, sell or pass away.
  • The home appreciates at 3% and the new home value after 15 years is $778,984.
  • The principal plus interest total $457,288 and the estate still has $321,696 in equity (41% of the home value at time of sale).

Home Equity Preservation Graph – CHIP Reverse Mortgage
The following graph is for Illustration purposes only *

Home Equity Preservation Graph – CHIP Reverse Mortgage The following graph is for Illustration purposes only

4) Negative equity guarantee – Many people ask, “what happens if the house doesn’t appreciate in value, and in fact depreciates?” Our negative equity guarantee ensures that if your home depreciates in value at the time the home is being sold, and the loan amount due is more than the sale amount of the property, the homeowner or the heirs will not be financially penalized for being on title of the home. In fact, HomEquity Bank, will pay the difference between the sale amount and the loan amount when the loan amount due is more than the sale amount of the property. However, just like all other home equity loans, the homeowner(s) must keep their property taxes up to date, and maintain the condition of their home. If these conditions are met, the borrowers will never owe more than the fair market value of their home, when the home is sold.

The above measures are all the reasons why a CHIP Reverse Mortgage customer will not lose their home to the lender. A CHIP Reverse Mortgage provides a great solution for a growing number of Canadian retirees. For more information on this solution for homeowners 55+, contact us today!

 

* The illustration uses conservative values:

  • Example based on the national price of Canadian homes of $500,000 (Average home price in Canada is $519,521 according to the CREA, February 2017)
  • Example based on CHIP Reverse Mortgage advance of 40%
  • Home appreciation of 3.00%. Average home appreciation is 7.16% annually. (Source: CREA, Canadian Real Estate Association 15-year national house appreciation average, February 2017). HomEquity Bank makes no representations on future housing market performance.
  • CHIP interest rate of 5.59%. The Annual Percentage Rate (APR) is 5.79%, which is the estimated cost of borrowing for 5 years expressed as an annual percentage. The APR includes interest and closing costs.
 

SPOUSAL BUYOUT MORTGAGE?

Spousal Buyout Mortgage?
If you happen to be going through, or considering a divorce or separation, you might not be aware that there are mortgage products designed to allow you to refinance your property in order to buyout your ex-spouse.

For most couples, their property is their largest asset and where the majority of their equity has been saved. In the case of a separation, it is possible to structure a new mortgage that allows you to purchase the property from your ex-spouse for up to 95% of the property’s value. Alternatively, if your ex-spouse wants to keep the property, they can buy you out using the same program.

Here are some common questions about the spousal buyout program:

  • Is a finalized separation agreement required?

Yes. In order to qualify, you will be required to provide the lender with a copy of the signed separation agreement. The details of asset allocation must be clearly outlined.

  • Can the net proceeds be used for home renovations or to pay out loans?

No. The net proceeds can only be used to buy out the other owner’s share of equity and/or to pay off joint debt as explicitly agreed upon in the finalized separation agreement.

  • What is the maximum amount that can be withdrawn?

The maximum equity that can be withdrawn is the amount agreed upon in the separation agreement to buy out the other owner’s share of property and/or to retire joint debts (if any), not to exceed 95% loan to value (LTV).

  • What is the maximum permitted LTV?

Max. LTV is the lesser of 95% or Remaining Mortgage + Equity required to buy out other owner and/or pay off joint debt (which, in some cases, can total < 95% LTV). The property must be the primary owner occupied residence.

  • Do all parties have to be on title?

Yes. All parties to the transaction have to be current registered owners on title. Solicitor is required to do a search of title to confirm.

  • Do the parties have to be a married or common law couple?

No. The current owners can be friends or siblings. This is considered on exception with insurer approval. In this case, as there won’t be a separation agreement, there is a standard clause that can be included in the purchase contract that outlines the buyout.

  • Is a full appraisal required?

Yes. When considering this type of a mortgage, it is similar to a private sale and a physical appraisal of the property is necessary.

If you would like more information on or help with the spousal buyout process, contact us today!

   

GETTING A MORTGAGE AFTER CONSUMER PROPOSAL OR BANKRUPTCY

Getting a Mortgage After Consumer Proposal or BankruptcyLife can definitely throw some challenging financial situations your way. As mortgage professionals, we can provide solutions and strategies during or after these challenging times in order to get you back on track. We have access to banks, trust companies and mortgage companies that specialize in this transitional period to help you move forward with the best mortgage plan for you. We protect your credit by negotiating with multiple lenders to find a solution for you.

If you have never owned a home and have had a consumer proposal, the good news is that you are already accustomed to the discipline of saving money every month. Should you choose to continue to grow your savings, those funds can then be put toward a down payment and re-establishing credit.

If you own a home already, there are lenders that will help you refinance and pay out your proposal earlier in order to accelerate your transition period.

After bankruptcy, different lenders will issue mortgages based on the amount of time since you were discharged, the amount of down payment on a purchase and/or the current equity in your home if your already own. Lenders then price their rates based on these aspects of your application.

At Ottawa's Home Team, we look forward to learning about your journey while protecting your credit and guiding you through the best strategy on a moving forward basis.

   

Managing Your Mortgage

Why is it important for you to have a mortgage manager? Reaching your financial goals is attainable!

There are some things to consider before securing your mortgage:
Is there a potential of you buying an investment property or a vacation home? Are you considering scaling up or downsizing? Do you think you might move or port your mortgage or retire within the next five years? All these scenarios come into play when setting up your mortgage.

If you had $500,000 cash to invest, how often would want your financial advisor to review your investments?

Why is it different when you are $500,000 in debt with your mortgage?

Why not have an active mortgage broker looking after your $500,000 debt?

Active financial advisors aim to grow your net worth by investing wisely.
Active Mortgage brokers will help you grow your net worth by reducing your debt and growing your asset base. You will cover only half of the prosperity equation without a mortgage broker.

Consider this: your bank’s main goal is to make money for the bank. This is understandable as they are in business to make money. As reported, banks make billions of dollars every quarter, in part, thanks to you. On the flip side, a mortgage brokers is an advocate for you and their main goal is to get you the best mortgage to meet your goals. This comes in many forms, not just the interest rate, although it is important there are other areas that could cost you more money in the long run.
An active mortgage broker can save you thousands of dollars over the life of your mortgage.
Most mortgages are set up on a five-year term. A lot can happen in five years.

Changes in life happen. You are forced to move, or you would like to move to a bigger home, down size, buy an investment home a recreational property, or take equity out to buy a business or perhaps retire.
Mortgage rules continually to change. What worked last year may not work this year. It is important to review your situation with your mortgage broker before making any major decisions with your current mortgage.
Being in the right mortgage may be the difference between being able to buy that investment property or recreational property. It may be the difference of paying a $3,000 penalty or an $18,000 penalty to close out you mortgage.

Remember, it is not getting a mortgage that is important, it is getting the right mortgage that will help you meet your future goals.
When it comes to your renewal time it is important to once again review your options with your mortgage broker.
Your current lender may not have the best rate or option for you at renewal time as there are many lenders and there are many options to choose from. At renewal time, you can change lenders with no penalty. Renewal time is also a good time to take extra equity out of your home to pay off debt, for investment purposes or to pay for that new kitchen you wanted.

I have called many clients well before their mortgage is due when I recognized it would save them thousands of dollars to refinance early. Moves like this help clients pay down their mortgage faster, provide extra cash flow for investments, and provide funds for renovations or a down payment on an investment property.
Having someone manage your mortgage can be a great benefit for you and your family.
If you currently do not have an active mortgage manager, we would be happy to help.

   

WHAT DOES THE FUTURE HOLD FOR MORTGAGES?

There have been a dizzying number of changes to the mortgage rules over the last six or seven years. The red hot markets in Toronto and Vancouver coupled with increased household debt and concerns over the risk to the Canadian tax payer through CMHC have caused the federal government to step in repeatedly. Here are a few of the changes we have seen.

  • Maximum amortization from 40 years to 25 years.
  • Mortgages must qualify on the stress test rate which is currently 4.84%.
  • Homes over $500,000 need 10% down on any amount over that threshold.
  • Homes over $1,000,000 are not eligible for mortgage insurance.
  • Refinances can no longer be guaranteed by mortgage default insurance.
  • Foreign buyers faced additional restrictions.
  • Home Equity Lines of Credit are maxed at 65% of the property’s value.
  • Refinances are maxed at 80%.
  • All outstanding credit cards and lines of credit have to be included at a 3% repayment.
  • Increased mortgage default insurance premiums.

This list could go on but these are some of the major ones. Recently the powers that be have announced another round of proposed changes which, if history holds true, we would anticipate to come into existence in October of this year.

The overall indebtedness of Canadian households through Home Equity Lines of Credit is a concern which may signal a further set of limitations to this type of mortgage.
There is consideration being given to a risk sharing model between the mortgage insurers and the banks. At the present time if you were to default on your mortgage the lender has the assurance that the default insurance will make them whole. Going forward this may not be the case.
How could you be affected? There will likely be an increased level of scrutiny applied to mortgage applications. If your credit is blemished or less than perfect you could face higher rates or be shut out of buying a home. They will likely also want to see savings beyond just the down payment and closing costs.

The fact of the matter is that if a bank has an increased risk overall they are going to certainly be more selective in who they lend their money to. The days of the best 5 year rate for everyone may be a thing of the past.

Currently there are lenders in Canada who charge slightly higher rates and make allowances for damaged credit, short self-employment tenure or other issues a borrower may be facing. Though these companies have nowhere near the loose lending guidelines in the U.S. which led to the melt down, the government would like all lenders in Canada to abide by the same guidelines and looking at ways to bring this into reality.
We will have to wait and see if these or other changes are actually implemented. It is fair to say that until the government is satisfied the housing sector no longer poses a threat to the economy, it will remain at risk of further changes. Long story short, if you are considering purchasing then you may want to proceed sooner rather than later. Rates have risen recently and there is uncertainty over the future of mortgages.

   

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