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Mortgage-Matters

Reverse mortgage pros, cons

There are pros and cons to a reverse mortgage so before you decide to move forward you should ensure that you consider them carefully.

Reverse mortgages are only available to Canadians 55 and older who own their home. The overall amount of the mortgage is capped at 55% of the value of the home for HomeEquity Bank and 40 per cent for Equitable Bank.

The good news is that you can’t borrow more than your home is worth.

How close you’ll be able to get to the cap depends on your age, your equity stake, the appraised value of your home, where you live and current interest rates, among other factors.

There are only two reverse mortgage lenders in Canada. Reverse mortgages are not available for properties that are located on leasehold land but there may be other options available.

You can access HomeEquity Bank directly or through a certified mortgage broker while Equitable Bank is only accessible through mortgage brokers. A reverse mortgage is a niche product and it’s important to get impartial advice to ensure that you know all of your mortgage options.

Here are some of the pros and cons to consider.

Pros

  • You don't have to make any regular mortgage payments
  • You may turn some of the value of your home into cash, without having to sell it
  • The money you borrow is a tax-free source of income
  • This income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting
  • You still own your home
  • You get to stay at home. This is very important for many people, often for sentimental reasons. According to a recent poll conducted by Ipsos for HomeEquity Bank, nine in 10 Canadian aged 65 and over feel that way.
  • You can decide how you receive the funds – in a lump sum advance, via regular monthly advances or a combination of both.
  • Leaving no inheritance and maintaining financial independence is arguably preferable to having to borrow from family to pay your bills in old age.
  • Boomers are the perfect generation to take advantage of reverse mortgages. Many of them, especially in Vancouver and Toronto, own homes that have doubled or tripled in value since they bought them. That appreciation is basically money for which they did not save and that they can now access for cash.

Cons

  • Interest rates are higher than most other types of mortgages
  • The equity you hold in your home may go down as the interest on your mortgage adds up throughout the years
  • Your estate will have to repay the mortgage and interest in full within a set period of time when you die. Generally within six months although that can be extended for extenuating circumstances.
  • There may be less money in your estate to leave to your children or other beneficiaries
  • Costs associated with setting up a reverse mortgage are higher compared to a regular mortgage

As with any mortgage products, it’s important to understand all of the terms and conditions. This is where the independent advice of a mortgage broker can assist you in understanding how a reverse mortgage works and the costs associated with obtaining a reverse mortgage.

If you would like more information about reverse mortgages please visit my site at www.reversemortgage-experts.ca or give me a call at 1-888-561-2679.



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Credit rating and mortgages

A lack of basic financial knowledge can be the difference between getting a mortgage at a great rate and having one where you have to make a much higher payment.

Your Fico Score, which is shown on your credit report accessed by lenders, indicates to a mortgage lender the probability of whether you will successfully make your mortgage payments on time.

Fico scores can range from a low of 300 up to a high of 900, which is the highest possible score. A good credit score would be in the mid to upper 600s and a credit score below 620 could prevent you from obtaining a mortgage from a prime rate lender.

So what makes up your credit score?

  • 35% is for late payments, bankruptcies, collections and judgments
  • 30% is for current debts
  • 15% is for how long accounts have been open and established
  • 10% is for the type of credit, such as credit cards or personal loans
  • 10% is for new credit enquiries

Here are some examples of the common mistakes that homeowners or potential homeowners make that can result in a poor credit rating.

  • Chronic late payments. Do not ignore the small stuff. No matter what the size, all bills must be paid on time, including your cell phone.
  • Maxing out your credit cards. You should not exceed over 50% of the limit on your card. Even if you pay off the balance every month, it will still negatively affect your Fico Score. Spread your spending out over a few cards.
  • Do not over apply to creditors and lenders. Don’t fill out applications at car dealerships if you are shopping for a car. Don’t fill out the credit card application at the booth in the mall or the airport. Every time you fill in an application they will check your credit.

A great tip for managing your credit is to pull your own credit report at least a couple of times a year. It is the responsibility of a consumer to correct any errors and it takes a long time for reporting to be amended should there by an error.

If you need to repair your credit, the best tactic for improving your credit score is to consolidate debt. Taking out a short-term second mortgage to pay off all debt will basically wipe the credit clean so it is positive.

By allowing two or three months for the reporting to go through to the credit bureau a few times, the report will start to show a higher credit score and you will now be considered for more competitive interest rates at an A lender.

There are some easy steps that can be taken to improve your overall financial picture and ensure that you are getting the best terms and rates whether you are renewing your current mortgage or looking to purchase your first home.

Moving from bruised credit to A credit simply takes time and sound advice. A great rate is within reach. Give me a call if you would like some advice and assistance to improve your credit score.



Monster in your mortgage

You have found your dream home. Congratulations!

Your realtor was a great negotiator and you bought your new home for $475,000. Your mortgage is $350,000 with monthly payments of $1,601 per month over a 25-year amortization.

You were also able to negotiate a great rate (2.69%) with your mortgage lender, so you are feeling pretty good right about now.

But wait a minute, let’s total those payments — 300 payments times $16,01 equals $480,000.

That’s $480,000 worth of mortgage payments over the next 25 years.

With your down payment of $125,000, does that mean you are paying $130,000 more than you agreed to pay for the house?

Assuming that there is no increase in mortgage rates over the next 25 years, the answer is yes.

If rates increase, the overall cost of buying your home will increase significantly as you renew your mortgage at higher rates assuming that rates will increase within the next five years, which is most likely.

If you are a typical Canadian mortgage holder, you will take a fixed rate mortgage (68%) Canadians are highly motivated to repay their mortgages as quickly as possible.

Surveys find consistently that each year more than a third of mortgage holders take actions that will shorten their amortization periods (making lump sum payments, increasing their regular payment to more than is required, or increasing the frequency of payments).

The most recent buyers expect that, on average, they will repay their mortgages in 22.2 years, which is 2.8 years shorter than their average contracted period.

The Monster in your mortgage is the interest you are paying. It’s really quite outrageous when you think about it. Yet every day, many Canadian homeowners are accepting The Monster in their mortgage without a thought to what it might mean to their overall financial health for the future.

The good news is, something can be done to weaken The Monster and make it nearly helpless.

With a few small affordable strategies that do not even require lump sum payments, you could potentially save thousands in mortgage interest even within the first five years of your mortgage.

You can start by setting your mortgage repayment at accelerated bi-weekly payments. Just rounding up your payment to an even amount will save you and then set yourself on a program to increase your mortgage payments annually.

These are only three of the many strategies that are available to get your mortgage under control and you don’t have to be a new homeowner or wait until your mortgage is up for renewal.

They can be implemented at any time during the life of your mortgage.

It’s up to you to get the ball rolling, so if you would like to know more specifically how these strategies can put a large amount of the interest on your mortgage back into your pocket, let me know.



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Renewing your mortgage

When your current mortgage is getting close to its maturity date, you will need to re-negotiate.

This is the opportunity to decide:

  • the new term length
  • to negotiate the new mortgage interest rate
  • to move your mortgage to a new lender.

Most lenders (federally regulated) are required to provide you with a new mortgage offer at least three weeks before your maturity date, if they are interested in renewing your mortgage.

They are not obligated to offer you a renewal should there be a change in your circumstances or a late payment history.

Statistics show that more than 50% of homeowners renew their mortgage with the current lender without negotiating the terms.

This doesn’t give the lenders much incentive to offer the best rates at renewal time. They are betting on the fact that you won’t shop around or won’t want to go through the hassle of applying for a mortgage with a new lender.

Signing the mortgage renewal offer without exploring other options is not in your best interest.

It’s easier to remain with your current lender as you don’t have to go through the hassle of providing new documents, etc., but you could find better rates and terms with another lender perhaps saving you thousands of dollars in interest costs.

Here are a few questions to ask yourself before you sign that mortgage renewal offer.

Have you explored all your options?

We can look for opportunities that could better meet your needs right now. 

Are you comfortable with your payments?

If you’ve been feeling financially strapped each month making your mortgage payments, this could be the time to reduce them to a more easily managed level.

On the other hand, if you’re earning more, why not pay down your mortgage faster and save thousands of dollars in interest over time? 

Do you need cash flow for other things?

Your priorities may have shifted since you first bought your home, and your cash flow needs can shift too. Things like paying for a child’s university education, planning a career change, or a major purchase such as a vacation property may call for spending money on things other than your home.

You may be able to refinance your mortgage to take this into account. 

Can you handle fluctuating rates?

Some homeowners are nervous about any hikes in interest rates, while others are comfortable to go with the flow. Rates are tough to predict. It’s best to base your decision on your personal situation, not what you read in the news, and tailor your mortgage renewal around your needs.

We can help you decide whether to opt for fixed or variable rates. 

Will you sell soon?

If so you might want to consider a shorter-term mortgage or one that has flexible terms so you’re not penalized if you sell your house before the mortgage comes due. Not all mortgages can be moved to a new property.

Are you thinking about a major renovation?

Before you renew, look at all your financing options, which may include getting an additional line of credit or keeping your monthly mortgage payments low so you have money on hand to finance the renovations.

When do you want to be mortgage free?

If you’re planning extended time away from work or perhaps an early retirement, it may make sense to pay down your mortgage sooner rather than later.

While increasing your payments will raise your monthly costs now, you’ll ultimately save on interest in the long term and can prepare for that fabulous, mortgage-free lifestyle. 

Could you use your home equity to fulfil other goals?

Refinancing a mortgage can be one way to free up cash you need for other things, which could even include buying another property. Mortgage renewal time is an ideal occasion to review all your options. 

Are you getting the best rates and terms? In a competitive mortgage environment, your good credit history can make refinancing work to your advantage.

We analyze mortgage markets daily to ensure you don’t miss any money-saving opportunities.

Questions about your mortgage renewal? Please give me a call at 1-888-561-2679 or email [email protected]



More Mortgage Matters articles

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About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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