New reverse mortgage player
COMMENT
Thirty years on, there is now some direct competition for reverse mortgages — a way for Canadians to access part of the value of their house without selling it.
Recently, the Equitable Bank announced it had entered that world with plans to offer the product which, in return for a chunk of cash, allows the homeowners to remain in their houses — in the large regional centres of British Columbia, Alberta and Ontario. Equitable Bank, which became a chartered bank in 2013, is following the Canada Home Income Plan Corp. CHIP launched in Vancouver in 1986 and by 2001 was offering its product in all provinces.
Known as the PATH Income Plan, Equitable’s product will be sold through licensed mortgage brokers and offer cash to those who want to make life a little easier in retirement.
But the cash being advanced is a loan, and has to be repaid when the recipient dies. The rate on the reverse mortgage compounds over time, meaning that, at death, the amount repaid will be larger than the amount borrowed. And the interest rate on the equity advanced is more than 200 basis points above rates for a regular mortgage.
A key term of Equitable’s offering is the maximum loan to value ratio: it’s a function of the age of the person applying and the value of the house.
The product is not available to those aged under 55, and a 60- year- old could expect to receive a maximum amount equal to 15 per cent of loan to value; a 70-year-old 25 per cent; an 80-year-old 35 per cent.
Loans aren’t advanced to people over 83, with the maximum amount advanced being $ 400,000. And the cash being advanced is contingent on receiving “mandatory legal advice.”
The person receiving the advance is responsible for the regular home operating costs including taxes, utilities, insurance and repairs.
So why enter the market, which by most measures is not as buoyant as in the U.K., the U.S. and Australia?
Kim Kukulowicz, vicepresident of residential sales at Equitable Bank, said the decision was governed by “favourable demographics,” with the 60- plus age group being the fastest growing; by “increased home ownership,” by high home prices, and because many Canadians can’t rely on workplace retirement plans.
“The idea is to meet the needs of Canadians going forward,” she added, noting Canadians are being given choices and “favourable competition. And it’s not for … dire situations.”
Another reason was that it rounds out Equitable’s consumer product lines, something to go alongside residential mortgages (some of which are non- traditional) and home equity lines of credit.
But it’ s not expecting huge demand, as “this year is learning what we don’t know,” said Kukulowicz, adding “tweaks” may have to be made to the product’s design.
Through CHIP Mortgage Trust, an entity formed in 2002, CHIP finances in the public markets and is hence a reporting issuer. According to its latest financial statements, on Sept. 30, CHIP had $572.9 million in residential reverse mortgages: one year earlier, the outstandings stood at $559.2 million.
One week back, HomEquity Bank, the provider of the CHIP reverse mortgage, said it originated $608 million in reverse mortgages in 2017. Overall, it has advanced $2.7 billion in reverse mortgages.
Reached Monday, CHIP’s chief executive, Steven Ranson, said he expected “someone would compete with us eventually because the market prospects are tremendous. In other parts of the world, where growth is larger, multiple providers have educated consumers, which helps boost the market.”