I suppose I should start this out explaining what a reverse mortgage is, huh? Or I could just do what I normally do, hire a bunch of monkeys to type until we get something that approximates English. Hey, it worked for Shakespeare. Or not, like I paid attention in science class.
Anyhoo, let’s talk a little about reverse mortgages, which, as the name implies, are like a regular mortgage, except backwards. FINANCIAL UPROAR: KEEPING YOU ON YOUR TOES SINCE 1932.
Let’s say your grandma is 74 years old, and even though she’s quite the looker for her age, the old dudes just aren’t showering her with cash. Yeah, apparently men do get smarter as they age. So grandma needs about $500 per month in order to supplement her pension.
She has a few options. She could cash out some savings and buy an annuity, which will guarantee her a certain amount of cash flow each month for a certain period of time. She could sell the house and use the proceeds to either invest or just slowly spend. Or she could even hit up her kids/grandkids, but nobody over 70 wants to do that. That’s pretty much admitting you’re a failure.
None of these are perfect solutions. Annuities are fee-riddled products and that cash flow goes away as soon as grandma kicks it. Selling the family home is something that no senior wants to be forced to do. Besides, moving is a pain in the ass when you can actually carry your own things.
So what’s the solution? For some seniors, it’s a reverse mortgage. Grandma puts her house up for collateral, and the mortgage company will give her $500 per month. This lasts for 1-5-10 years (or until grandma borrows up to 40-50% of the value of her house) while interest keeps accumulating. These days, the interest rate on a reverse mortgage is five or six percent annually.
Say she keeps this up for a decade. After ten years, grandma will have taken $60,000 worth of equity out of her house, and will owe in the neighborhood of $70,000 total once we add up all the interest. (That could be off, but like hell I’m going to calculate it to the penny)
That’s pretty much it. Reverse mortgages are a pretty simple product. Does that mean you should invest in them?
Investing in reverse mortgages
I won’t bury the lede. I think investing in reverse mortgages is a good idea over the next decade or two. There are millions of potential customers coming down the pipeline, thanks to the glut of baby boomers getting ready to retire.
Like with any sort of lending business, you’d have to be picky about who you’re forwarding money too. The biggest reverse lender in Canada has the following requirements, which I’d recommend you adhere pretty closely to:
- The minimum age is 60, with 65 strongly preferred
- Must own their home outright
- Maximum of 5% of the home’s value paid out each year
- Once the homeowner hits 40% of the value of the house, they’re cut off
(Note: these might be slightly off. I’m going by memory here and the company is tight-lipped about lending standards. Help me out, anyone with more info.)
And that’s about it. They’re pretty simple products.
The next step is to find seniors who need cash. There are a variety of different ways you could do this, including advertising in newspapers (seniors actually read the classifieds, so I’d start there), spending time at the places where old folks hang out, and hitting up the people in your community who run seniors’ support services. You could probably do well at the hospital too, but that’s a little weird even for a guy like me.
There’s another way, and that’s approaching a mortgage broker. Sure, you’ll have to pay them a fee to get the deal in the first place, but that’s not bad in the scheme of things. You’ll also have to offer a slightly better deal than the leader in the field, whether that be looser lending standards or a reduced interest rate. Or, you could pledge that you’ll approve deals in 8 hours with only a minimum amount of paperwork. Remember, mortgage brokers want the deal of least resistance.
In an era where GICs and government bonds are paying peanuts, getting 3% above prime on a reverse mortgage is a pretty attractive rate for the fixed income part of your portfolio. Doing second mortgages – which I’ve advocated before – is scary at this point in the housing cycle, at least in Canada. As long as you stick to borrowers with a fully paid off house and you’re firm about when to cut them off, the market could crash 25% and you’d still be in a pretty comfortable spot.
I like the idea, and will pursue it when I get back to Canada. If I do find somebody interested, I’ll let you guys know how it went down, assuming I haven’t given up this terrible blog for something infinitely more rewarding, like playing Ants in the Pants or admiring my collection of Alf pogs. He’s back guys…in pog form.