Is a Reverse Mortgages may be the least costly way to access the equity in your home?
One of the consequences of all the mortgage rule changes made by the government is that lenders are now required to place more emphasis on the borrower’s income and their ability cover the cost of their mortgage payment.
Under the old lending guidelines retires who were relying on CPP, OAS and maybe some small work pensions could go into their bank and take out a line of credit at the best rates and this line of credit could be used to help supplement their income until they were ready to downsize or move to an assisted living arrangement. These lines of credit were typically at prime plus ½% to 1%, the as what any homeowner could get.
Gone are the days where lenders could just rely on the fact that the client had good equity in their home. In the past if lenders limited the amount of the mortgage to less than 65% of the value of a property they often times did not even request any confirmation of the borrowers income. The government has made it clear that equity in a property is only one factor lenders should consider and if they cannot confirm that the client has enough income to make the mortgage payment lenders should not be providing a mortgage regardless of how much equity a client has.
So what financing options are available to seniors that have limited income coming in, lots of equity in their homes but are just not ready to sell their homes at this time.
There are still some lenders that will allow a higher percentage of a borrower’s income to go towards their monthly expenses. These lenders charge interest rates that are a little above the best rates available and a little lower than what is available with a reverse mortgage. The challenge with this option is that in most cases the borrower must take all the money upfront which results in a higher interest costs and a larger monthly payment.
Reverse mortgage interest rates fit in just above these rates but with the advantage of not needing to take all the money upfront. By only drawing money when you need it you can reduce the interest costs over the life of the mortgage. The other big plus is that with the reverse mortgage there are no monthly payments so you can lower the amount you need to borrow each month as you don’t have to borrow to cover the monthly payment on the line of credit or mortgage. And reverse mortgages are not based on how much income you are currently receiving. They are considered to be equity loans.
Currently the only other source of equity loans is through the mortgage investment corporations or private lenders. These lenders typically require to take all the money upfront but may be flexible in terms of making monthly payments. However, these loans will typically be priced at 1 ½% to 2% or more above the rates being offered by the reverse mortgage companies. So not only are you paying a higher interest rate you are paying the higher interest rate on all of the money right away.
Now this does not mean that a reverse mortgage is right for everyone but what it does mean is that it is important to carefully look at all your options before making a decision and to see which options results in the lower cost over the period of time you need to borrow the money. In some cases a higher interest rate can result in a lower overall cost if you only need to access a small amount each month to help with your living expenses.
If you have any questions about reverse mortgages or would like to explore what options you may have you can call me at 604-961-2400 for a no cost, no obligation mortgage review.