Writing a reverse mortage
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Thread: Writing a reverse mortage

  1. #1
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    Writing a reverse mortage

    I am somewhat familiar with making a conventional mortgage loan. I'm curious if anyone knows about whether an individual can write a reverse mortgage to a non-related person, and what sorts of things happen.

    The homeowner is

    not quite old enough to collect OAP/GIS and CPP, but owns a home.
    not old enough to qualify for a conventional reverse mortage, and they're usurious crap anyway

    The idea would be to privately lend 50% of the home value now, basically write a private reverse mortgage, then once the income streams come online for the borrower, convert to a conventional mortgage and collect back as available. If I can afford to leave $150K tied up at an expected yield of 1.5% for 10-15 years, is this a feasible way of helping out a friend in need?


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    Quote Originally Posted by gardner View Post
    I am somewhat familiar with making a conventional mortgage loan. I'm curious if anyone knows about whether an individual can write a reverse mortgage to a non-related person, and what sorts of things happen.

    The homeowner is

    not quite old enough to collect OAP/GIS and CPP, but owns a home.
    not old enough to qualify for a conventional reverse mortage, and they're usurious crap anyway

    The idea would be to privately lend 50% of the home value now, basically write a private reverse mortgage, then once the income streams come online for the borrower, convert to a conventional mortgage and collect back as available. If I can afford to leave $150K tied up at an expected yield of 1.5% for 10-15 years, is this a feasible way of helping out a friend in need?
    Isn't there a scheme already for reverse mortgages called Canadian Home Income Plan, (CHIP) where the person owning the house can get up to 55% of the appraised value of the home, a lump sum and not have to pay a penny back on the reverse mortgage until he moves, sells or dies.

    What makes you think your scheme is any better.."for a friend in need". ..and why is he a "friend in need" right now that you want to tie up $150K for 10-15 yrs at 1.5% interest per annum?

    Alsio,what happens if that person dies or loses the home?
    or
    Bank forclloses in the meantime (if there is still a mortgage)?
    Last edited by carverman; 2017-01-07 at 08:49 AM.

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    Kudos to being a good friend.

    I'll let more experienced people chime in on the legal feasibility, but I expect there's nothing blocking you and your friend from signing a contract which is a loan with defined repayment conditions as you see fit. I'm less sure about what it would take to put your reverse mortgage on title, i.e. to secure it against the property rather than be an unsecured loan. You would at least doubtless need a lawyer's help on this.

    I'd advise you to think carefully about the risks you are taking in doing this.
    First, what happens in case your friend can't get a "conventional" mortgage at the expected time? Conventional credit standard for mortgages may tighten, rates may rise, real estate values may (finally?) pop. Are you OK if your expected 10-15 year investment becomes a 30-40 year one? Or would you effectively foreclose on your friend to get your money?
    Second, independent or together with #1, what if you can't get all your money back? 50% of value sounds safe after decades of a real estate bull market. But 60%+ of 2016 value (after factoring in the interest accumulated) in a not-so-great market, maintenance possibly not up to date etc.
    What if your friend dies, or needs to move for health reasons (and needs capital)?

    Chances are the right yield/rate, given the risks, is considerably higher than 1.5%. Are you comfortable with essentially gifting your friend that difference in value?

    I write this since I have -- implicitly -- sorta done this. My parents are immigrants with insufficient retirement funds but fully paid-for house. I support them as needed, first since it is the right thing to do and I am happy to help them, but also since I, as only child, will be their eventual heir. Therefore a 3rd party solution (e.g. conventional reverse mortgage) would cost both them and ultimately me money. A bit unpleasant to think about that way, but them's the facts. This is of course different than your situation, but has forced me to think through these issues at least a little bit

    [Editing to add: see carverman made some of the same points; we were typing at the same time]

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    Quote Originally Posted by carverman View Post
    Isn't there a scheme already for reverse mortgages call Canadian Home Income Plan, (CHIP) where the person owning the house can get up to 55% of the appraised value of the home, a lump sum and not have to pay a penny back on the reverse mortgage until he moves, sells or dies.

    What makes you think your scheme is any better.."for a friend in need". ..and why is he a "friend in need" right now that you want to tie up $150K for 10-15 yrs at 1.5% interest per annum?

    Alsio,what happens if that person dies or loses the home?
    or
    Bank forclloses in the meantime (if there is still a mortgage)?
    Carver, I think what gardner is saying makes his/her scheme better is that the borrower is not yet of an age to qualify for a reverse mtge. through conventional channels.

    Gardner, I would say you can draw up any kind of mortgage you like, although a reverse mortgage in the circumstances you describe is a bit unusual. I take it the property in question is at present clear title.

    You say you would "basically write a private reverse mortgage, then once the income streams come online for the borrower, convert to a conventional mortgage and collect back as available." To what "income streams" do you refer? From you, as reverse mortgagee? From some other source of income anticipated by the borrower downstream?

    I think we lack sufficient detail about your circumstances and those of the intended borrower to make any worthwhile suggestions. But you could also consider other types of mortgage financing, including a demand mortgage.

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    Quote Originally Posted by Mukhang pera View Post
    the borrower is not yet of an age to qualify for a reverse mtge. through conventional channels.
    Yes, exactly. I think the conventional reverse mortgage can only be had above age 62.

    Borrower would be in late fifties with dwindling income, but clear title and full ownership.
    At age 65-67, depending, would be drawing OAS, GIC, CPP totaling something like $1,500/month.
    The trick is to bridge the 8 or 10-year gap in income without being forced to sell.

    With nearly no income, access to conventional financing is not possible. I am exploring whether I could somehow provide the bridge financing via a reverse and then regular mortgage at favourable, but not completely laughable rates. At the moment it's just a thought exercise.

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    Why not just hold a conventional mortgage of $150K ... you give your buddy $150K, your buddy starts making payment as per whatever rate you come up with e.g 1% for whatever the first term e.g 2 years if that's what it will take for your buddy to start collecting CPP/OAS. And at 2 years, new term, new rate, ... A reverse mortgage implies to me that interest is accumulating but not being paid ... and that is what I really don't like about those things ...
    If money isn’t bringing you happiness, you aren’t spending it right …

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    Quote Originally Posted by houska View Post
    Kudos to being a good friend.

    You would at least doubtless need a lawyer's help on this.

    I'd advise you to think carefully about the risks you are taking in doing this.
    First, what happens in case your friend can't get a "conventional" mortgage at the expected time?

    Second, independent or together with #1, what if you can't get all your money back? 50% of value sounds safe after decades of a real estate bull market. But 60%+ of 2016 value (after factoring in the interest accumulated) in a not-so-great market, maintenance possibly not up to date etc.

    What if your friend dies, or needs to move for health reasons (and needs capital)?

    Chances are the right yield/rate, given the risks, is considerably higher than 1.5%. Are you comfortable with essentially gifting your friend that difference in value?

    [Editing to add: see carverman made some of the same points; we were typing at the same time]
    There has to be a registered mortgage, if the lender wants security on the property.otherwise a "promissory note" that the receiver of the funds will pay back so much, after so much time is meaningless, if the receiver defaults.

    The lender must be on a mortgage title with the owner of the property, or have a registered mortage that must be paid off in full, if the owner dies, or unable to pay.

    Reverse mortage companies (such as Home Equity Bank..(CHIP) has procedures to secure their reverse mortage investment.
    I looked into this a couple years ago but found that their up front costs were significant.

    and their interest rate on the money I would borrow for the 55% amount of reverse mortage a bit steep..
    Variable3 4.99%
    closing and admin costs $1495

    APR: 5.22%
    (Borrowing $150k at this rate over 25 years can be as much as $123,807 of interest rate amortization, which
    you would have to pay back if you move (sell) or your estate has to pay (if you die).

    If you don't have the money to pay back the interest on the reverse mortgage loan..they take your house!

    CAVEAT EMPTOR
    ===========
    Although they mention that you never have to pay a penny until you move, sell or die,(estate debt), if you happen to be 62 and live for another say 22 years ( to age 84), the interest growth on $150k will pretty much use up quite a bit of the remaining equity..unless you are living in Toronto or Vancouver where the real estate prices keep escalating.

    B]Where do the Downsides of Reverse Mortgages Come From and How Can I Avoid Them?[/B]

    The downsides to reverse mortgages are usually related to the fact that that option was not best suited for that particular person and their circumstances or based on some misconceptions about reverse mortgages. For example:

    Renegotiating is not an option down the road.

    Reverse mortgage interest rates are higher than standard mortgage rates. Although they share similarities in name, they are very different things.
    You can’t refinance your house while under a reverse mortgage
    Interest on a reverse mortgage is typically higher because you have the option of never making an interest payment until the selling of your home
    Set up costs are as follows:

    Appraisal Fee

    Typically from $175 to $400 as an out-of-pocket cost.
    Actual amount varies by province and for urban and rural properties.
    Request for an independent appraisal is ordered through CHIP.
    Independent legal advice is required
    Typically $300 to $600 as an out-of-pocket cost.
    Price range assumes no title issues.
    At your request, CHIP can provide a list of legal advisors in your area.
    It is recommended that you discuss fees with the legal advisor before proceeding.
    Legal, closing and administrative costs

    Costs are $1,495 for all of our interest rate options.
    These costs will be deducted from your CHIP Home Income Plan funds so they are not an out-of-pocket expense.

    Cost includes title search, title insurance and registration


    What if my house drops in value?
    All CHIP reverse mortgages are designed to keep you well protected by never exceeding the value of your home on the market and there is no risk of default.
    Last edited by carverman; 2017-01-07 at 09:35 AM.

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    OK. So for a person requiring income (not large capital) a line of credit will usually be more favourable then a reverse mortgage in almost all cases. The only caveat is that a home equity line of credit requires interest payments and there is no guarantee that the debt will get too high and require one to pay it down/sell the house.

    That being said, the benefits of a line of credit as opposed to a reverse mortgage, for someone requiring income, is that with a reverse mortgage they actually lend you a lump sum and then buy an annuity to provide the income. You might only need a few hundred dollars a month, but to provide that they will lend you a very large lump sum to provide it. That would not bother me except that the borrower is accruing interest on a large lump sum when in fact they only received small amounts of income. Thought of another way, if the RM lender and the annuity provider were the same company, they go to their vault, give you a large lump sum. You then give back the lump sum and they put it right back into the same vault. They are in no different position after you came in to their office as they were before you came in, but you are now acruing a very large interest spread on this transaction. Doesn't sound like something I would ever do, but I am the type of person who does not like paying for nothing, and can usually figure out where the pebble is in these types of shell games.

    The benefit of a HELOC is that if you need $500 next month, you take it from the HELOC and only pay interest on $500. If you don't want to pay interest payments then simply borrow $501.66 next month from the LOC and so you can pay back the $1.66 of interest it would require, if the interest rate was 4%.

    Now obviously over time this $500 per month draw, plus the interest will start to add up, but in most cases you will need to live a very long time before it becomes the same level as the reverse mortgage a person would take on their very first day.

    Reverse mortgages are only for people who need lump sum capital (not income) and don't mind spending a very large amount of their heir's inheritance to provide a fairly small amount of financial benefit for themselves. Here I am talking about people without children as well as people who have no intention of providing any estate for the children they have.

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    Quote Originally Posted by OptsyEagle View Post
    a line of credit will usually be more favourable then a reverse mortgage in almost all cases
    Yes, I agree that this would be a better proposition. The real underlying question should probably have been: what are the options to help out someone in XYZ position, while securing at some level against the real-estate? Can an individual write a HELOC -- or something equivalent -- to an unrelated person, then? As others have said, I suppose you can write a contract for whatever you want, so I guess this would be possible.

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    Quote Originally Posted by gardner View Post
    Yes, I agree that this would be a better proposition. The real underlying question should probably have been: what are the options to help out someone in XYZ position, while securing at some level against the real-estate? Can an individual write a HELOC -- or something equivalent -- to an unrelated person, then? As others have said, I suppose you can write a contract for whatever you want, so I guess this would be possible.
    You could write either a reverse mortgage or HELOC but the issue would be getting the legalese down properly.
    There are pros/ cons to each.
    Often with a reverse mortgage, the principal from the mortgage is used to buy an annuity to provide the mortgagor with lifetime income. Generally people who should be looking at reverse mortgages are people who are not concerned about leaving an inheritance. The issue for the lender is that with the interest being added to the principal monthly, the balance owing could potentially exceed the value of the property. In theory the owners of the property have no worries about that unless they sell before they pass on and need funds for long termcare which may not be available due to diminishing equity.
    This is the reason CHIP and others have age and loan to value threshholds.
    The issue with a HELOC is it may be difficult to qualify for with limited income. You also have to ensure payments are made each month and manage the withdrawals.
    If the home owner goes through the money and runs into the limit, he will be forced to make payments from other income which depending on interest rate and income could be onerous, possibly forcing the homeowner to sell.


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