REVERSE MORTGAGE – SOME COMMON MISCONCEPTIONS

The words reverse mortgage carry some negative connotation. What does it really mean? What makes reverse mortgage different than a regular or demand mortgage in Canada? There are no payments required if 1 applicant lives in the home. Payments can be made if they wish, they are truly optional.

No medical required and limited income and credit requirements.
Clients can receive up to 55% of the value of their home in tax free cash, depending primarily on their age, property type as well as location.

COMMON MISCONCEPTIONS & OBJECTIONS:

I heard they were restrictive and bad for seniors.

Much of the negative press around reverse mortgages originated out of the U.S. The rates, fees, and restrictions are quite different from what is offered in Canada. The reverse mortgage providers in Canada follow the same chartered bank rules as other major lenders.

The bank will own my house.

This is only a mortgage; the title and deed remain in the client’s name. The owner will not be asked to move, sell, or make payments for as long as at least 1 applicant lives in the property.

I’ll lose all my equity.

The maximum the lender can finance is 55% of the value of the home. The average advance is more like 35% of the value, leaving ample equity to fall back on. If the real estate market increases at an average of about 2% to 2.5% per year over time, clients will find their home value increasing just as much over time as the balance owed.

The costs are too high.

The closing costs are the same as a regular mortgage, approximately $1,800, includes the appraisal and lawyer fee.

A line of credit is better and cheaper.

A line of credit is a great solution for someone with good credit, cash flow and most importantly someone with a regular income.

I paid off my mortgage, I don’t want more debt.

Leveraging money from your home is not debt. It’s the equity accrued over the duration of ownership. Only the interest is debt.

Why are the rates higher than a regular mortgage?

Other lenders can lend out money at lower costs. This is because they have other services to sell the client to help recoup their cost. The regular mortgages also require a regular repayment frequency; thus, the lender is constantly receiving funds back to re-lend.

I heard they have high penalties and you can’t get out very easily.

This is well suited for seniors looking to keep the reverse mortgage in place for 3 or more years. There might be other solutions for a timeline that is shorter. Penalties are always waived upon death of the last homeowner. Penalties are reduced by 50% if selling and moving into a care facility.

I don’t need money very much so it’s not worth it.

The newest program offered is called Income Advantage. It allows clients to access money on their own timeline, when they need it or a pre-determined auto-advance. Borrower only pays on the amount advanced. The minimum advance required is $25,000.

If you’d like to talk to see if a reverse mortgage is a good fit for you, please don’t hesitate to reach out to a Dominion Lending Centres mortgage professional.

MICHAEL HALLETT

Dominion Lending Centres – Accredited Mortgage Professional
Michael is part of DLC Producers West Financial based in Coquitlam, BC

7 QUESTIONS TO HELP YOU DECIDE IF YOU SHOULD PURSUE A HELOC, REFINANCE OR SECOND MORTGAGE

HELOC, Refinance or Second/Third Mortgages? Which one should you choose to go with? If you have decided to tap into the equity in your home, the three can seem to be interchangeable at times and for many consumers can be a difficult decision on which one to select. We have laid out seven questions to guide you through the decision, for your unique situation. We’ve also broken this down into three categories, Equity, Payment and Availability.

PAYMENT

1. HOW WILL I RECEIVE THE MONEY?
• HELOC: Home Equity Line of Credit-withdraw as needed
• Refinance: Lump Sum
• Private Second/Third Mortgages: Lump Sum

2. WHAT IS THE INTEREST RATE?
• HELOC: Prime Rate + premium 0.5%-1.5%
• Refinance: Best fixed or variable rate (dependent on what you and your broker decide)
• Private Second/Third Mortgages: 6.95%-19.95% typically with lender/broker fees

HOW IS THE INTEREST CALCULATED?
• HELOC: interest accrues on what you withdraw from your home’s equity.
• Refinance: interest accrues on the full loan amount that was taken out.
• Private Second/Third Mortgages: interest accrues on the full loan amount that was taken out.

3. WHAT IS MY PAYMENT?
• HELOC: You pay back the interest only, however, most banks will have a minimum rule so even if your HELOC value is $0 you will still have to pay a nominal fee each month.
• Refinance: You will pay the interest, plus the principle principal loan amount.
• Private Second/Third Mortgages: You can pay interest only payment or pay the interest plus the principle principal loan amount.

EQUITY

4. HOW MUCH EQUITY DO I NEED TO HAVE IN MY HOME IN ORDER TO ACCESS IT?
• HELOC: 20% minimum
• Refinance: 20% minimum
• Private Second/Third Mortgages: 5-10% minimum

5. HOW MUCH EQUITY CAN ACCESS?
• HELOC: You can access up to 80%
• Refinance: 80% of your home’s equity is accessible
o HELOC portion can be up to 65% of your home’s equity
o Mortgage portion must be 15% – as per Bank of Canada guidelines
• Private Second/Third Mortgages: 1st mortgage + 2nd/3rd mortgages up to 95% of home value

AVAILABILITY

6. ARE THERE FEES ASSOCIATED WITH IT?
• HELOC: No fees associated with it
o At times
 Appraisal fees
 Legal fees
• Refinance: Prepayment penalty of Interest Rate Differential or 3 months interest* depends on your current mortgage terms.
o At times
 Appraisal fees
 Legal fees
• Second/Third Mortgage: There are several fees associated with a second mortgage including:
• Appraisal fees
• Legal fees
• Lenders fees
• Broker Fees

***One final note on refinancing: With the new stress-testing you will have to qualify at a higher rate and you will also have to consider that lenders can no longer insure the product… meaning there are many different rates with different lenders.

Once you answer each of these questions and review your options, you can decide which one is best suited for your needs. You can also always call a Dominion Lending Centres Mortgage Broker and discuss it. DLC brokers are well versed in each of these options and can direct you towards the best option for your situation. We’ve seen a variety of situations with our clients and have helped each of them reach their goals.

GEOFF LEE

Dominion Lending Centres – Accredited Mortgage Professional
Geoff is part of DLC GLM Mortgage Group based in Vancouver, BC.

DON’T FORGET THE CLOSING COSTS WHEN YOU PURCHASE A HOME

The purchase price you negotiate when buying or selling a home is just one part of the total cost for buying a home. In addition to the purchase price there are several other fees – known as closing costs – all of which you need to factor in to your purchase price.

Closing costs tend to be hidden costs when buying a home. It’s not a set number, but a compilation of various administrative, legal fees and other one-time expenses associated with the purchase of a home that are due on the completion date.

These costs can add up, so you’ll need to factor these costs into your cash-on-hand budget.

Many first-time home buyers under estimate the amount of cash they will need for closing costs. Typically, you’ll want to budget between 1.5% and 4% of the purchase price of a resale home to cover closing costs.

Of course, these are estimates — the actual amount you will need could be higher or lower, depending on factors like where you live, the type of home you’re buying, or if it’s a new construction (+5% GST).

To help you plan the purchase of your property, here’s a snapshot of the extra fees you can expect to pay once you’ve settled on the price of your home.
o Legal Fees
o Title Insurance
o Fire Insurance
o Adjustments
o Property Transfer Tax (PTT)
o GST
o and more…

Here’s an overview of what you can expect.

Legal Fees: Legal/Notarial Fees and Disbursements. The lawyer/notary is the person who goes through all the paperwork and makes sure that everything is legitimate and binding. They confirm that all the items that were agreed to by the buyer, seller/builder, and lender are written and worded correctly. Your legal representative should also be able to walk you through each document that you sign so that you understand what you’re agreeing to. Legal fees range from $500 to $2,500. You will also need to reimburse them for their out-of-pocket costs that they incurred while handling the various searches and registrations, including title insurance (see below), property and execution searches, and the registration of the mortgage and deed. These disbursements are repaid to the lawyer on the closing date, as well as incidentals such as couriers, certified cheques, and photocopying, the land transfer tax, the down payment, and any interest adjustments.

Title Insurance: Title refers to the legal ownership of the property. The deed is the physical legal document that transfers the title from one person(s) to another. Both the title and deed of the home must be registered with a land registrar.

Most lenders require title insurance as a condition of granting you a mortgage. Your lawyer or notary helps you purchase this.

Title insurance protects you from title fraud, identity theft and forgery, municipal work orders, zoning violations and other property defects. It can also protect you against fees and costs that were not caught in the searches your lawyer conducted prior to the sale (Yes this can happen!).

Title insurance premiums range from $150-$500 depending on the value of the property.

Fire/Home Insurance: Mortgage lenders require that you have fire/home insurance in place by the time you complete the purchase of your home.

Property insurance protects you in case of fire, windstorms or other disasters. It covers your home’s replacement value. The amount required is at least the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size and extras being insured, as well as the insurance company and the municipality. Home insurance can vary anywhere from $400 per year for condos to $2,000 for large homes.

Adjustments: An adjustment is a cost to you to pay the seller for the seller prepaying for something related to the house including property taxes, condo fees, heat etc. on your behalf.

Simply put, if you take possession in the middle of a month, the seller has already paid for the whole month and you must pay the seller back for what they’re not using. These adjustments are prorated based on the date you complete your purchase of the home. The most common adjustments are for property taxes, utility bills and condo fees that have been prepaid.

Property transfer tax (PTT) in British Columbia, is a tax charged to you by the province. First-time home buyers are exempt from this fee if they are purchasing a property under $500,000. All home buyers are exempt if they are purchasing a new property under $750,000.
• In British Columbia, the PTT is 1% on the first $200,000 of purchase, 2% over $200,000 & 3% on any value over $2,000,000.

GST is a federal value added tax 5% on the purchase price of a new home. If someone has lived in the home, the home isn’t subject to GST.
• There is a partial GST rebate on new properties under $450,000.

Interest Adjustment Costs: Most lenders expect the first mortgage payment one month after completing the purchase of a home. If you close mid-month, please note some lenders expect the first payment, or at least the interest accrued during that time, on the 1st day of the next month. When arranging your mortgage, ask how interest is collected to the interest adjustment date.

Other closing costs: Will your new home need furniture? Carpets? Lighting? Window coverings? Appliances? Do you have the equipment you need to maintain the lawn and gardens? Are you hiring movers or renting a truck? Will you need boxes, bubble wrap and tape for the move?

While these and other out-of-pocket costs aren’t part of the real estate transaction, you still need to budget for them. Plan your expenses as much as possible. If necessary, decide what you can put off buying until later, after you move in and get settled. If you have any questions, a Dominion Lending Centres mortgage professional can help you out.

KELLY HUDSON

Dominion Lending Centres – Accredited Mortgage Professional
Kelly is part of DLC Canadian Mortgage Experts based in Richmond, BC.