Earlier this summer, the federal government changed the regulations for mortgages in Canada. The desired effect was to tighten up the criteria for mortgages, which may make reverse mortgages a more attractive option for seniors.
Before discussing how the new mortgage rules may make reverse mortgages more attractive to Canadian seniors, we need to define a few eye-glazing technical terms and talk about what the changes were. We promise it won’t hurt too much.
Amortization Terms Reduced
30-year mortgages were phased out under the new regulations. The cap for amortization has been moved down to 25 years, a move that significantly increases monthly payments. While it’s always a good idea to pay off your home more quickly, if you are carrying a mortgage in retirement your considerations are lower monthly payments, not a fast payoff period. And the longer amortization periods proved popular with all buyers; over 40 percent of all home buyers in Canada were on 30-year mortgage terms before the rules were introduced. This means that a significant percentage of Canadians will see their monthly payments increased, including seniors.
Loan to Value Ratios
Before the regulations went into effect, the desired customer for most financial institutions was someone with a low loan-to-value ratio (LTV). This ratio is achieved by dividing the mortgage amount by the appraised value of the property. The lower the ratio, the more risk-free the loan is to the bank and the more attractive it is to them. While LTV requirements weren’t affected as a part of the regulation changes, the other changes mean that they aren’t given as much weight when a house comes up for refinancing. This means that a senior who has a mortgage that is close to being paid off may be turned down for traditional financing if they have a lower income in retirement, where this would not have happened before the changes took place.
Gross Debt Service and Total Debt Service Ratios
These two ratios are very important in determining the affordability of a mortgage in retirement. A monthly payment that you are making pre-retirement may not be sustainable with your post-retirement income. According to CMHC, your housing costs must cost no more than 32% of your total household income. This amount is your Gross Debt Service. The trickier figure for seniors to negotiate is the Total Debt Service ratio, which according to CMHC should be no more than 40% of your total household income. This figure includes housing costs, so if you are carrying a mortgage on a high-value home or have a lower income in retirement, this only leaves 8% of your income for other debts such as credit card bills and lines of credit.
How it All Ties Together for Seniors
The 30-year mortgage traditionally left room to juggle a higher total debt service ratio and a lower retirement income. With the new regulations in place, there is no more “wiggle room”. While LTV is still a key indicator for the bank, reduced amortization periods and tighter GES/TDS ratios could rule out financing for seniors that would have qualified for it in the past, or have them qualifying at higher interest rates that make carrying the costs of paying off a mortgage into retirement a burden.
Tax Considerations
Since income is now more of a factor in getting a decent rate from the bank, seniors carrying mortgages in retirement now need to ask their accountants to consider their incomes as a factor when they’re having their income tax returns prepared. Seniors still carrying a mortgage may want to delay cashing out a RRIF or other investment vehicle in order to ensure a better rate on a mortgage and a lower monthly payment. This is a complete reversal from how seniors are used to thinking about tax returns and income and retirement.
Where Reverse Mortgages Come In
One of the highest fixed costs in any monthly budget is the cost of a mortgage. By taking out a reverse mortgage to pay off your home, you don’t need to worry about potentially higher monthly payments when you refinance your home. You only need to pay up front for a home appraisal and legal advice, just as you would if you were putting your home up for sale. After those initial costs are covered, you don’t pay a cent until your home is sold. Think of all the money this will free up for travel and other things that you didn’t think you could afford in retirement.
Horizon Equity has been helping Canadian seniors stay in their homes and reduce their debt burden with a reverse mortgage for years. We can help you determine if a reverse mortgage is the best option for you to reduce monthly payments during your retirement. Give us a call today and we’ll be happy to help you.