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Writing a reverse mortage

5K views 25 replies 12 participants last post by  carverman 
#1 ·
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?
 
#2 · (Edited)
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)?
 
#4 ·
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.
 
#3 ·
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]
 
#7 · (Edited)
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.
 
#6 ·
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 ...
 
#8 ·
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.
 
#9 ·
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.
 
#12 · (Edited)
$1500 a month isn't going to be enough income to support even a modest lifestyle, taxes, maintenance, utilities, and a mortgage payment.

In any scenario, without selling the home to the OP or someone else, the home owner will not be able to make the mortgage payments.

One option would be for the home owner to sell the home to the OP and rent it using the proceeds from the sale.

The sale proceeds would decline until the retirement benefits begin, when the decline would be slowed or halted.

My sister was in the same situation and her son purchased her home with a mortgage.

She rents the home from him and he has to claim the income, but has the mortgage costs to offset the income.

From what I understand, they have come to some agreement if the home is sold on a fair split of any equity gains in the home.
 
#16 ·
$1500 a month isn't going to be enough income to support even a modest lifestyle, taxes, maintenance, utilities, and a mortgage payment.
Not sure where the $1500 a month comes from ... the OP is talking about loaning the home owner $150K at 1.5% ... that should work out to $2250 of interest *for the year*.
Unless I am missing something, the home owner gets to use the OP's $150K where only about interest of about $187.50 to pay a month.

An important question is what is the homeowner's spending rate that the $150K would need to fill the gap for and how quickly it would be used up in the 10 to 15 years.


One option would be for the home owner to sell the home to the OP and rent it using the proceeds from the sale.
The sale proceeds would decline until the retirement benefits begin, when the decline would be slowed or halted.
Assuming the full house is sold, then the full proceeds sounds like it doubles to something like $300K.


She rents the home from him and he has to claim the income, but has the mortgage costs to offset the income.
Note sure how this would work for the OP ... to maximise the mortgage costs, the OP would have to take out their own mortgage on the house, as the house is currently mortgage free.


From what I understand, they have come to some agreement if the home is sold on a fair split of any equity gains in the home.
While the son can redistribute proceeds as a gift as he sees fit ... he will have to pay the capital gains on the increase in value.


Cheers
 
#19 ·
This is one CHIP offering from HomEquity Bank, however, depending on appraisal and your age (especially at age 55),
you may not get the 55% of the appraised value.

Depending upon you and your spouse’s ages, and the location and type of your home, you can access up to 55%[/B] of your home’s value. This limit is set because CHIP wants to ensure that you still have equity left in your property if you decide to sell. Additionally, the amount to be repaid to CHIP will never exceed the fair market value of your home, so your estate is safe and you won’t need to come up with extra funds to repay your CHIP reverse mortgage.

Single lump-sum: 100% of funds the homeowner
is approved for.
• Initial lump-sum with Subsequent Advances:
homeowner takes less than 100% of approved
funds initially and sets aside the rest.
• The minimum initial advance is $25,000.
 
#20 ·
As I understand it, OP has said reverse mortgage is unavailable due to age and felt to be too expensive. Seeking ways he(?) can help friend to the tune of a $150k lump sum, to be paid back in x years or earlier.

It is of course possible to just loan the money (with a promissory note). This requires an amount of trust in the friend, an amount of confidence in their financial situation -- and probably some confidence in their eventual executor in the event of their death. That is in effect what I have done (without even the promissory note!) for my parents, since I know them well, help them manage their finances anyway, and am their eventual executor and sole heir.

If this is too loosey-goosey, as I expect it would be between "just friends", it is my (inexpert) understanding -- and implied by some of the responses above -- that it should be possible to make it a private mortgage registered against the title on the property. I found the following by googling: http://www.lsuc.on.ca/with.aspx?id=2147490134 which implies the paperwork is *more* significant than for a financial institution mortgage, but a real estate lawyer should be able to help (for a fee of course).

You could of course also investigate purchasing part ownership of your friend's property for $150k now, which s/he repurchases back from you later. I expect this might have tax implications, since any gains on the property value would not be tax free to you since it is not eligible for the principal residence exemption. But it would be a way to help your friend as a real estate investor rather than as a lender (different risk-return profile). I'm assuming from your description of the situation that both of you are open to a range of solutions that i) do put your capital at some but bounded risk, and i) the terms are structured so as to keep you whole with a small (lower than market but positive) return on your capital.
 
#24 ·
......

You could of course also investigate purchasing part ownership of your friend's property for $150k now, which s/he repurchases back from you later. I expect this might have tax implications, since any gains on the property value would not be tax free to you since it is not eligible for the principal residence exemption. But it would be a way to help your friend as a real estate investor rather than as a lender (different risk-return profile). I'm assuming from your description of the situation that both of you are open to a range of solutions that i) do put your capital at some but bounded risk, and i) the terms are structured so as to keep you whole with a small (lower than market but positive) return on your capital.
Actually, in this case, according to CRA the gain in value would be tax free.( as long as the OP was part owner only and the land amount was under the limit and it is not a rental and the friend continues to live in the property as prin res) This has been discussed before on this forum and links provided.
 
#21 ·
Not sure where the $1500 a month comes from ... the OP is talking about loaning the home owner $150K at 1.5% ... that should work out to $2250 of interest *for the year*.
Unless I am missing something, the home owner gets to use the OP's $150K where only about interest of about $187.50 to pay a month.


You are missing the part where the loan converts to a mortgage upon receipt of government benefits of $1500 a month.

Income of $1500 to provide for living and home ownership costs, plus an additional mortgage payment, would be difficult to maintain.
 
#23 ·
Lots of debate here on reverse mortgages but let me give you a different angle.
Not sure what exact help your friend needs but I'm assuming its for covering debts? If that is the case, why don't you straight up buy his house and have him pay you rent for as long as he lives there?? The funds from the sale would liberate your friend's debtload and hopefully leave him with sufficient funds to have substantial savings for future use. This does not tie up your personal finances and the rent would cover any incurred expenses. You can choose to get a mortgage for the purchase so no money would come out of your pocket. The day your friend moves on or you mutually agree that you no longer wish to hold the property, you can simply sell it.
 
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