How to Apply for a Mortgage when Retired?

October 16, 2020

Talking more about your mortgage questions!

This week I talk about how to apply for a mortgage if you’re retired!

I am joined by Lawrence Mak, of Remax Realtron Realty, to discuss what you need to know about getting a mortgage when you’re retired!

Below, we talk a bit more about your weekly mortgage questions!


Don’t feel like watching? Find the full transcript below!

How do I apply for a mortgage when retired?

Lawrence: [00:00:00] Hey, everyone. It’s Lawrence Mack here with RE/MAX Realtron. Here again with Chris Molder from Tridac Mortgages. Hey, Chris, How are you doing?

Chris: [00:00:07] Lawrence! Very good. Thank you. Thanks for having me.

Lawrence: [00:00:09] Excellent.Well, today. We’re gonna talk about the different options that people have when they’re retired or maybe they’re no longer working. And so I get that question a lot from different people, typically because they’re retired and they just want to know what the different options are. So just wondering, what are the options, Chris?

What are my options?

Chris: [00:00:29] Yeah, it’s a good question. And it’s no secret that we have an aging population. So there are evolving products that are being made available for Canadian seniors. And really, I think there are three different categories. One would be relying on income and qualifying for a mortgage in a traditional sense. We’ll talk about that in the second. Option number two is something called a network program, a specialty program developed by lenders. And then option number three is what we call a reverse mortgage, which is one of the fastest-growing mortgage products in Canada. And so we’ll talk a little bit about that.

This year, especially, has been a banner year for reverse mortgages. So option number one is a traditional qualification for a mortgage. So even though you’re retired, presumably there’s still income coming in and the main sources of income are pensions, old age security, CPP. If you’re lucky enough to get a company pension, that income can be included. And then you might also be drawing income from your RRSP.

So it might be a risk or you might still be in an RRSP and drawing income from that. So if you can demonstrate enough income on an annual basis, we’ll need to establish a two year average of that income, especially if you’re using investment income. But a lender will look at the two-year average and qualify you for a mortgage traditionally. So simply put, your income for a year versus your liability per year. There’s what we call a debt service ratio, and as long as the numbers work, you qualify for a traditional mortgage.

2020 a banner year for reverse mortgages

Chris: [00:02:20] Easy peasy. With me so far?

Lawrence: [00:02:22] So far, so good. Easy peasy.

Chris: [00:02:23] Ok, so option number two is what we call the network program. And this is a unique product. Not every bank or lender has it, but it’s really designed to support Canadians, especially retired Canadians who have great asset positions but don’t have a lot of income. And in this program, the lender will take a look at your monthly cash flow to establish a bare minimum that you qualify for. But more importantly, they’re going to look at your assets that are available, specifically financial assets. So savings, stocks, bonds, investments, money and TFSA, RRSPs, RESPs, RIFS and they will match for every dollar.

You have an investment, they’ll match and give you the equivalent in mortgage money without demonstrating this debt servicing requirement. And so that’s really unique and a useful product for a lot of seniors. It should be noted that you do not have to pay a premium in interest rate to qualify for this program, just a regular bank product. If you qualify and you have to really demonstrate via bank statements and investment statements that you can meet the criteria.

Lawrence: [00:03:46] For in that particular case then as you mentioned before. So it isn’t really a premium on the interest. So you’re basically getting kind of like a regular mortgage.

Are there maximums?

Chris: [00:03:54] Yeah, Yeah

Lawrence: [00:03:54] Which is great.

Chris: [00:03:56] Yeah. So, so really useful for those who aren’t earning full income anymore, but have an excellent asset position.

Lawrence: [00:04:05] Now is there a specific threshold like saying a million dollars, five hundred thousand, five million dollars, whatever it is, or is it case by case basis?

Chris: [00:04:13] Yeah, that’s a good question. I do believe that the maximum of the program is seven hundred fifty thousand dollars, OK? However, if we have a particularly strong applicant who needs to stretch to a million dollars for whatever reason, it could be considered on a case by case basis. OK, and then the third option you mentioned was reverse mortgages, reverse mortgages and reverse mortgages are an interesting topic. And there is a lot of history around reverse mortgages, specifically in the US and in the U.K. that give it a very negative connotation.

Are they more expensive than conventional mortgages?

Lawrence: [00:04:52] Yeah, I mean, I’ve heard that reverse mortgages are just really expensive in terms of the interest and just really bad. But I mean, if you can shed some light on that. That’d be great.

Chris: [00:05:00] Yeah, yeah, and there were past products for very draconian. Here in Canada, we have a major player and that is Chip reverse mortgage. So that’s the Canadian home income plan and that is provided by Home Equity Bank. So they’ve really revolutionized the product here in Canada. And the criteria of assets, the criteria of income all get thrown out the window. It’s really based on two factors. Do you own a home and your age? So if you are 55 and older, you can get up to fifty-five percent of the value of your home in mortgage money. And on the surface, you have to think in three dimensions when you think about the utility of a reverse mortgage because let’s get the interest rate out of the way.

Yes, the interest rate is much more expensive.

So we’re looking at setting an expectation between four and a half and five and a half percent, depending on the term of the mortgage. OK, but what ends up happening with the reverse mortgages that we do not need to make payments back to the lender? Instead, we call it a reverse mortgage because whatever the principal amount that’s lent to you originally is, is not repaid until the home is sold or you pass away and each little bit of interest accumulates and gets added to the final payout amount.

So if you borrow one hundred thousand dollars, you stay in the property for 15 years, that might be fifty thousand dollars of debt. So when the property is sold 15 years in the future, you pay back one hundred and fifty thousand dollars to the lender. That’s why we call it a reverse mortgage. But it has a very, very high utility, for example, that you may have a situation where there’s a senior living in the home. It’s free and clear with no mortgage, but they need money for any number of reasons to support lifestyle.

Toronto can create an expensive lifestyle

Living in Toronto is an expensive place supporting lifestyle for many families. The choice is, do you sell your home or do you get some sort of financing to help a family in early inheritance? Most people want to help their kids while they’re still alive, but don’t want to sell their house. So the reverse mortgage allows that type of utility. So somebody who might be wanting to work with you, Lawrence, is relying on their parents for a down payment. There is the ability for the parents to provide that down payment money through something like a reverse mortgage, and then it can be used to pay for medical expenses.

[00:07:57] This pandemic is highlighted that going to seniors residence is not optimal for most people. So most families would prefer to have their seniors live in their current home. So their home they’ve been in for 50 years. It’s a family place, but in-home care is expensive. So how do you cover that? You can get a reverse mortgage and so the interest rate almost becomes secondary. And then you also understand this concept is you borrow the money. Yes, the interest accumulates, but you’re also holding on to an amazing asset, which is Toronto real estate, which 10 years from now anyway, is going to go up in value.

Hopefully, you’re the expert in that area. But presumably looking at the past, real estate appreciates in value and offsets whatever expenses you incur. So when you start to think about it from different angles, it actually is not a terrible product and really gives families a lot of options. And I really focus on the family with this product because usually, it’s seniors with children. There’s sensitivity around inheritance, around the value of a home, who gets what. And so it’s really a family decision when we’re talking about reverse mortgages.

Understanding interest rates

Lawrence: [00:09:20] Well, some might also think, though, because the interest rate is so much higher, why can I can those people just get like a line of credit where you get the prime rate plus one or something like that trying to get a more expensive reverse mortgage? Can you talk about that?

Chris: [00:09:33] Yeah, absolutely. I mean, the reality is, is that a line of credit is no different than a mortgage in terms of qualification. So you have to demonstrate to the lender the ability to debt service the payments. We need income in order to offset the expenses and you run into the same problem. So the line of credit isn’t really an option for those who would be eligible for a reverse mortgage.

Lawrence: [00:10:04] Yeah, Makes sense, so just because they can’t really serve a debt, they have to sort of use this option, which is using the equity of the House in order to get the money from the bank.

Chris: [00:10:13] Correct. You got it. Exactly. And when you really and I’ve spoken to families about this, Lawrence, you may have some experience, maybe even your own parents or seniors in your own life. Kind of Guy. They’ve got that home paid for. They’ve had it paid off for years now, maybe decades. And life starts getting more expensive. And the reality of having to sell a home is quite traumatizing for a lot of families and difficult it’s not an easy decision. So this gives them the ability to stay. And also, I should mention that there is a lot of flexibility inside the reverse mortgage product. So one thing that I come up against is they’ll say, well, you know, I’d like to get more money, but I have an existing traditional mortgage from my bank. Can I still get a reverse mortgage?

You have options!

The answer is yes. We can replace you don’t have to have your home paid off to get a reverse mortgage. You can replace an existing mortgage with a reverse mortgage. Also, the reverse mortgage can be set up as a line of credit. So maybe you have a home that’s free and clear. Let’s say it’s a million-dollar home. You could qualify for five hundred fifty thousand dollars as a reverse mortgage line of credit bureau zero initially. And then as life goes on each month, you can take a draw or when you need it, you can take a drop so you don’t have to borrow all the money upfront. So that’s also very useful.

Lawrence: [00:11:45] Those are really, really good options. So sounds like there’s a lot of details, again, with this particular all these different products for if you are either retired or you no longer have working income and you’re just trying to figure out what the best way is to get a mortgage your money. So it seems like if you have any questions about that, just talk to Chris Molder from Tridac Mortgages at any time.

Chris: [00:12:06] Thanks very much.

Lawrence: [00:12:07] How can we reach you?

Chris: [00:12:08] Yeah, I was just going to say you need to reach me. Just Google my name. Chris Molder!

Lawrence: [00:12:37] Thanks a lot for joining us again this week, Chris. Talk to you later.

Chris: [00:12:42] See you later, Lawrence. Thank you.

Helping you find answers for your mortgage matters!

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Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.