EPISODE TRANSCRIPT BELOW!
Tracey: Hi, this is Tracey Brock from Dominion Lending Centres and we’re here at the Real 101 show speaking to Sean Russell from CHIP Reverse Mortgage. Sean, thanks for coming out.
Sean: Thanks so much Tracey. I really appreciate it.
Tracey: Great. So, we’re just going to talk about the CHIP Reverse Mortgage. It’s definitely getting them to be a more of a topic these days in the general public. And I have some questions for you. What is the maximum loan to value that CHIP will lend on a CHIP Reverse Mortgage?
Sean: We are looking at 55% loan to value, Tracey. And the reason we’re looking at a maximum of 55% is we’re a conservative lender. We don’t want our demographic to run out of equity in their property so we do keep it really low. So, the maximum is 55% loan to value. And then just to be clear, just in case people aren’t understanding what a CHIP Reverse Mortgage is, what is that demographic? Our youngest age that we’ll work with is 55 years of age. And there is no maximum age. I’ve done a reverse mortgage for a hundred-year-old in the past in my eight years at home equity bank. So, we don’t have any cap on age, but 55 is the youngest and if it’s a married couple, Tracey, we do need both spouses to be over the age of 55.
Tracey: Okay. So, when we go back to the loan to value, how do you determine what the loan to value is? Based on one couple, two couples, age, age, all that other stuff, like what do you do?
Sean: Sure. So, it’s really two major factors that we’re looking at. Number one is the client’s age. And so, to keep it really simple, the older you are, the more loan to value you’ll qualify for. And we’re also looking at location, so it’s age and location. And the way you look at a location is in Ontario, the closer you are to the GTA, the more loan to value you’ll receive. So let me put that in perspective for you.
Sean: Let’s just take for example, a 75-year-old client living in a detached home somewhere in the GTA. That 75-year-old would qualify for probably between 47% and 50% loan to value. Somewhere in that range. If we get a younger client and we say, how about a 60-year-old client also living in the GTA? We could see that loan to value went down to in the low thirties. So again, we keep it very conservative for the purpose of ensuring there’s going to be equity remaining in the home when your client either sells their property or eventually ages in place, passes away, and the estate takes care of it. So, we want to make sure there’s some equity left in the property.
Tracey: Does a type of property like condo versus detached matter?
Sean: It used to matter. We’ve made some changes on our end where in the GTA specifically, it does not matter the type of property. So, whether you have a condominium in Toronto or a detach, it won’t have any impact on loan to value. However, when we’re dealing with properties outside of the GTA, the type of property will matter, and so therefore, a condo says in let’s just pick Berry, Ontario would have a less loan to value than a detached home in Berry, Ontario. Not by much, but by a little bit.
Tracey: Okay. And what about if they were on a farm, like we’re talking about people that have hobby farms or other farms. Do you guys go into those type of properties?
Sean: Depending how it’s zoned Tracey. So, we need the zoning to be residential.
Sean: So, if somebody has a hobby farm and it’s zoned residential, we definitely will lend.
Sean: And the maximum will lend in that case would be the property itself, but the home and 10 acres of land. So that’s how you would evaluate the property.
Tracey: So, what’s the most common reason that people find themselves wanting a CHIP mortgage?
Sean: It’s changed over the years and thank you for that question. I love it. Right now, the last six months in particular, almost all of the reverse mortgages I’m seeing and our company is seeing has to do with cash flow. And I think the best thing for me to do here would be to use an example for you. And let’s just take a 70-year-old client, let’s say one of your clients, Tracey, that mortgage at, let’s call it RBC bank, just for argument’s sake. So, you locked them into a three-year mortgage RBC about two and a half years ago, and they’re 70 years old. That mortgage is coming due in the next six months, and that 70-year-old is going to have some sticker shock because you would’ve locked them in two and a half years ago at about two and half percent interest rate. And today, they’re going to be renewing at 5 and a half to 6%.
Tracey: Or better.
Sean: Sticker shock is incredible. The impact on that individual’s cash flow is incredible because in all likelihood they are relying on the government of Canada pension. Maybe they’ve got a little bit of extra income perhaps, but generally speaking, they’re relying on a standard pension and so that is going to impact them in a very negative way in terms of their cash flow. So, we are receiving a whole lot of reverse mortgages with the scenario I just described so that we can pay out that RBC or TD or Scotia first and then leave the client with a little extra if that is indeed the case. And now, they’re having no payments with the reverse mortgage.
Tracey: You guys won’t allow a second mortgage. So, will you let them renew with RBC and then help them take equity in the house to pay that RBC?
Sean: We do have to be in first position so any secure debt we will indeed have to pay out of our funding. However, you bring up something good. With our product, for example, let’s just say we’re doing a reverse mortgage for one of your clients and we can’t offer them enough money to offer a full solution for them. We do allow you, Tracey, to place a small private second behind us if there is indeed a shortfall. And if that does work for your client, we do indeed offer it.
Tracey: Okay, so what are some other common uses that somebody might take out a CHIP mortgage on their home?
Sean: So, over the years I’ve seen a number and leading up to what we just described in the last six months, prior to that. The big one was what we call a living inheritance. And this is where we were getting individuals in their seventies, early eighties. Taking out a reverse mortgage to then take that lump sum of money and gift it to their adult children. And what those adult children were often doing is they were taking those chunks of monies, whether it’s $100, $150, $200,000, and they were purchasing a home with that. They were using it for a downpayment. So, the parents were essentially saying, why wait until we pass away? I’d rather see you enjoy this money today, that we’re going to be leaving you regardless at some point. And then they can see the kids enjoy those funds. So that was really something that was very common for a couple of years leading up to the most recent six months. In addition to that, we do purchases for individuals. So, if somebody wants to say, take a reverse mortgage and purchase a vacation property somewhere, we can help them with that. We can help a renter move into a property they’re looking to buy and they don’t have enough to say, purchase the entire property.
Sean: They put a downpayment. We offer our reverse mortgage on that purchase and we can help them out in that regard. So, there’s a whole lot of ways that we can help individuals. People can get creative. The fact of the matter is, Tracey, that as long as you’re over 55 and you own your own home, you’re going to qualify for some sort of offer from us.
Tracey: Okay. That’s good to know. Maybe I need to tell my dad about that early here. Obviously, with the Chipman mortgage, when I get calls from different clients, they’re really concerned about the equity that’s left in the home and once the mortgage is said and done, or once they move into a long-term care facility or pass, everybody wants to leave some type of inheritance. So, what is the no negative equity guarantee that CHIP offers?
Sean: Thank you. That’s a wonderful one. In my eight years here with HomeEquity Bank and working with the CHIP Reverse Mortgage, one of the biggest objections we face is somebody saying, “I’m going to run out of equity in my home.” And I can tell you about the tenure of our company, which is coming on 40 years soon. We don’t have very many, if any, people selling their home or passing away with negative equity in their property. And the reason being, we have obviously very low loan values that we offer, and we’re factoring in somebody’s age to make certain there’s going to be some equity left. Now, the no negative equity guarantee addresses some worst-case scenarios that sometimes clients think about, and I know you can remember and some of your listeners will likely remember this as well. If we go back to 2007, 2008 in the United States, we had the major housing crisis. Now we know it impacted Canada a little bit. But nowhere near the extent of the US and there were a lot of individuals, Tracey, that had reverse mortgages in the US. No affiliation to us, of course, but they had United States based reverse mortgages and there were a lot of individuals losing their homes because what we saw in 2007, 2008, was house price value here. We saw a reverse mortgage value here, and then in about six months, we saw this happen. The house was worth less than the value of the reverse mortgage. And so, a lot of bad things happened in the United States. And so, what we’ve done is we’ve put a no negative equity guarantee on our product to say that if that catastrophic event happened in the US, in 2007. If it were to ever happen in Canada, we would take the loss on that. We would not call alone because our loans are non-callable. We’re not kicking people out of their homes. So, our clients in Canada have no worries whatsoever should some sort of catastrophic housing event take place.
Tracey: Oh, that’s great. And can they find that information somewhere if they wanted to look it up themselves?
Sean: Oh, absolutely. It’s right in our final contract. So, when a client takes on a reverse mortgage, the last step of that process, Tracey, is where they go for independent legal advice. So, they’re visiting a lawyer to go through the contract. And that no negative equity guarantee is right in our final contract where everybody’s signing off on.
Tracey: So, then what you’re saying is that there will be equity in their home after five years, 10 years, 15 years.
Sean: That’s right. That’s how we set up our loan to values to make sure that’s going to happen. Now, of course, there’s scenarios that could take place that are outliers. Such as a client living to 105 years old, say, in a case like that, they could indeed run out of equity as a CHIP Reverse Mortgage holder if they should live a very long time. But what’s going to happen in that case is we’re not going to ask the estate for more money. We’re not calling that loan. We’re not ask again to leave their home. They simply would then pass away at a very old age with no equity left in their home. But it’s a rare occurrence that somebody has no equity in their property.
Tracey: They’d have to start off pretty early with the CHIP voice.
Sean: Very true. Very true.
Tracey: Yeah. Okay. Does Home Equity Bank own the client’s home?
Sean: Absolutely not, but it’s interesting, as much as we’re becoming more mainstream out there, and we’re working with many people like yourself, there’s still a lot of people that believe that Home Equity Bank owns the home. And to answer the question, we do not. We are simply a charge on title, just as any other lender would be, like an RBC, TD, Scotia, whomever. We’re in charge of the title. We don’t own the home and we don’t foreclose on people. We don’t kick them out of their house. So, the answer is no, we don’t.
Tracey: Yeah, I think that’s a misconception. I don’t think people understand that as soon as you put any mortgage on your home, whether it be a reverse mortgage or just a standard mortgage through an institution or something different like that, essentially. They do have a portion of that equity involved and money that you took out in the equity is what they are deserving back.
Tracey: Same with everybody. So, I think that’s maybe the misconception in that situation. So, the mortgage broker, how long does it typically take for a client to receive the funds? And I understand every mortgage broker. Some are really speedy like me and others aren’t.
Sean: That’s right.
Tracey: Others take some time. So, what’s the typical time from the time of approval, I guess is the question, to funding?
Sean: Perfect. Let me run through that for you. And yes, so, somebody efficient like yourself, Tracey, I’m going to use that as an example. We’re looking at about 20 business days. So, one full month is very typical for our funding and really the key component to funding a deal efficiently is after you’ve submitted the deal to us on behalf of your client. Once we get that appraisal back, we can move very quickly.
Sean: And so, the key component is submitting the deal and then getting the green light to order that appraisal. Once it’s done and we have the report back, we can move very quickly from there. But if I had to sum it up, I’d say 20 business days.
Tracey: So, the clients always should expect an appraisal when they’re getting a CHIP mortgage?
Sean: 100% yes. It’s a must. It’s part of the process. We have to do it. We base all of our loan to values and our numbers off of that appraised value.
Tracey: Okay. Alright. That’s a lot of great information. Is there anything else that you wanted to add in or anything else that you wanted to mention?
Sean: Yeah, I would say to anybody listening, with the reverse mortgage, there’s apprehension from the unknown, fear of the unknown, and I think there’s a lot of resources out there and you’re one of them, Tracey, so somebody working with you is obviously going to lean on you for that resource. And I think once people start to look a little closer at this and talk to you about it, they’ll realize that it’s a great option. I’m not saying it’s the perfect option. It’s a wonderful option. And what we find in our funding is, how many people will say to us, I wish I had done these two or three years sooner. And so oftentimes people are very reluctant to try something that they’re a little fearful of, but they realize once they’ve taken the reverse mortgage and the stress that’s taken off of their shoulders, they wish they had done it sooner. So, I’ll leave you with that.
Tracey: Okay, that’s wonderful. So, if anybody wants to work with CHIP, you can definitely reach out to a mortgage broker like myself or somebody in your area. You can also go to CHIP directly. Sean has a great resource and I just want to say to all the mortgage brokers out there that Sean is actually an awesome person and he’ll come on the call with you and help you with the whole process of explaining to the client as well. So, I always appreciate that, Sean. So, thank you.
Sean: Thank you.
Tracey: So, if you, anybody, wants to reach out to Sean or to CHIP mortgage, you can definitely call me at firstname.lastname@example.org, or call me directly at (416) 788-6207. Thank you everyone. This has been Real Estate 101 and we look forward to seeing you next time around. Have a great day!
Episode Hosted By:
Tracey Brock – Mortgage Broker M09001257 Dominion Lending Centres
Sean Russell – District Vice President