Canadians who take out a reverse mortgage often worry about how quickly their equity will evaporate. For many, home equity is the only financial security.
That's why anyone considering a reverse mortgage needs to know what will be left over at the end.
Factors that determine this include:
- How much you borrow
- How long you borrow
- How much your house increases/depreciates in value
- The interest rate you pay – today and in the future
This last variable keeps many retirees awake because of its unpredictability. Many fear that factors such as structural inflation, rising federal deficits and declining demand for government debt could drive up borrowing costs over time.
In a refreshing change, people looking to take out a reverse mortgage now have a new insurance policy against this unpredictability: an interest rate that is locked in for as long as they have the loan.
It comes from a company called Bloom Financial, a smaller player in the reverse mortgage game with a reputation for shaking up the status quo.
Essentially, the offer is like any other reverse mortgage: no payments, tax-free cash, and the guarantee that you'll never owe more than the value of your home.
The highlight is that, unlike other reverse mortgage providers, there is no risk of interest rate adjustments. The Bloom plan is valid for life, while the competition only locks you in for up to five years.
“We believe this is the most consumer-protecting reverse mortgage in Canada,” says Ben McCabe, founder and CEO of Bloom Finance.
The costs
Currently, the price for this insurance is 6.69 percent, which Bloom calls the “SafeRate.”
That's just 15 basis points more than a comparable 6.54 percent five-year fixed-rate mortgage.
Note that Equitable Bank and Home Trust offer options that are 25 basis points cheaper than Bloom's SafeRate, but these loans have lower maximum borrowing limits and prevent you from taking unscheduled advances (a money-saving feature that allows you to borrow when needed to minimize interest expense).
If you hold a SafeRate reverse mortgage for 10 years – about the industry standard holding period – you'll pay about $2,785 more for every $100,000 you borrow.
With almost identical prices, you permanently eliminate the fear of future prices.
Other things you should know:
- Unlike some competitors who accept annoying tariff premiums for renewal, Bloom's offer does not include any premiums for a tariff adjustment.
- You can borrow up to 55 percent of the value of your home, depending primarily on your age, location and the characteristics of your property.
- Bloom waives all prepayment penalties if you need to downsize, move into assisted living, or die. (Remember: If you move to a cheaper property, you may have to pay off part of Bloom's loan with the proceeds from your home sale, but you can maintain the same LTV in the new location.)
- Bloom borrowers can withdraw money in a lump sum or as needed, without the annoying $50 withdrawal fees that competitors charge.
However, this product is absolutely not for everyone.
If you only need money for a short period of time, stay away from it. Because Bloom has to pay its backers a premium to commit for so long, the breakage costs are higher than usual.
If you leave early, you'll face a penalty of eight percent in the first year, seven percent in the second year, six percent in the third year, five percent in the fourth year, four percent in the fifth year and three months' interest thereafter.
This is based on the mortgage balance at the time of early repayment. Please note: All reverse mortgage providers incur penalties. The only exceptions are if you meet the waiver criteria or pay more for an open option. HomeEquity Bank offers one of these for 8.95 percent plus a fee that's either $2,995 or 1.25 percent of the loan amount, whichever is greater—so flexibility doesn't come cheap.
However, the likelihood of early prepayment – which is not already covered by the nice little escape clauses mentioned above – is low for people who choose this product.
In summary
This isn't Bloom's first reverse mortgage innovation. The Bloom Card is the only solution that allows homeowners over 55 to borrow on demand with a credit card, similar to a home equity loan, but without payments and with guardrails to ensure people don't overspend.
The Bloom card doesn't work with this product yet, but the company hopes to add this functionality next year.
All in all, SafeRate is a welcome example of a stubborn competitor eclipsing the big dogs to the benefit of consumers.
However, my opinion on reverse mortgages is always the same: try to avoid them in the first place. Saving enough so that we don't have to borrow until we retire should be high on the priority list.
But that's much easier said than done in a country where affordability seems like a nostalgic concept. And when your finances go in a direction no one predicted, it's reassuring to know that more predictable reverse equity solutions finally exist.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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