Canadian Boomers are back to tapping their home equity to make ends meet. Office of the Superintendent of Financial Institutions (OSFI) filings show reverse mortgage debt hit a new record high in March. The record balance is still slowing in growth, but made a monthly increase larger than last year. That’s impressive, considering how fast this segment of debt was growing last year.
Reverse Mortgage Debt
Reverse mortgages are a way for senior homeowners to tap home equity, without selling. Home equity is pledged for a loan, given in a lump sum or regular payments. They’re similar to a home equity line of credit (HELOC), but with a few key differences. The biggest one is no payments is required until the loan is due. Generally, the loan is only due when you move, sell, die, or default. If you’re cash strapped and want to stay in your home until death, it’s a popular way to do it. If you want to stay in your home and didn’t diversify your investments on the way up, it might be your only move.
These aren’t exactly a social service though, and the generous borrowing terms mean a higher cost. The interest rate is higher than most mortgages, meaning interest racks up fast. If you’re not making regular payments like you would with a mortgage, it also means it snowballs fast. Higher interest rate and no payments are a quick way to see equity disappear. The technical term for this type of loan is an “equity release,” and you can guess why lenders don’t use the term often.
Canadians Owe Over $3.6 Billion In Reverse Mortgage Debt
The amount of reverse mortgage debt outstanding reached a new record high. Reverse mortgage debt totaled $3.62 billion in March, up 1.94% from the previous month. This represents an increase of 28.37%, compared to the same month last year. Any way you cut that number, it’s a substantial increase.
Canadian Reverse Mortgage Debt
The total of reverse mortgage debt held by regulated finacial instituitions, in Canadian dollars.
Source: Regulatory Filings, Better Dwelling.
The monthly increase was larger than last year, softening the rate of deceleration. The monthly increase is actually 37.6% greater than that seen during the same month last year. The annual rate of growth continued to decelerate, but the monthly jump softened the drop. Now the rate of growth appears to be stabilizing, but it’s too soon to tell. One month isn’t enough to conclude a trend is reversing, but we could be getting close to a stable rate of growth.
Canadian Reverse Mortgage Debt Change
The annual percent change of reverse mortgage debt held by regulated finacial instituitions.
Source: Regulatory Filings, Better Dwelling.
Reverse mortgage debt is still one of the fastest growing segments of debt in Canada. Even with the rapid deceleration, it’s growing at a rate 7x faster than regular mortgage debt. The total balance is still relatively small, but the growth is huge.
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Really funny to think the government “measures” household wealth without taking into consideration collateral debts.
Interest for those of you watching Australia, since they’re basically the same macro economic setup as us for housing. They cut rates for the first time in three years, but the cash rate and wholesale funding rate is rising, so banks raised mortgage rates 15 basis points.
Basically, banks are now seeing the risk in lending, and a cut will have a hard time lower those risks, because the discount isn’t enough to change the debt levels.
https://www.abc.net.au/news/2019-06-04/reserve-bank-governor-flags-further-rate-cuts/11178898
They should call Poloz. He would probably be happy to buy Australian MBS to help the needy (I mean the bankers). He is a Robin Hood of sorts…
Wonder what happens to economies when homes stop being ATMs. This is not a sustainable chart.
To recap:
– Locals use lowest interest rates in recorded history to drive record real estate appreciation
– Interest rates then go even lower, locals push prices higher (especially echo boomers hot for condos)
– Volume-hungry and price-insensitive foreign money (largely wealthy Chinese) take it even higher, to a level that the vast majority of locals can’t reach
– Boomers, who are notoriously poor savers, slow-bleed from peak equity to keep lifestyle afloat
This can all hang together as long as 1) locals have excess credit capacity at current interest rates, or 2) interest rates can go lower, or 3) foreign money inflows continue unabated.
Unfortunately, for the first time in a very long time, these 3 variables are each tipping over.
Steven .Steven. Steven. ….
How Could You of ever let it get this far..?.
Once the distortions become so ingrained in the hearts of Canadians , no one knows the way home.
“Extremes” they can be low or they can be high but they all cause unsavory consequences. Just ask your neighborhood mechanic…or doctor.
Have you seen the out of pocket cost of cancer drugs? You can easily run up tens of thousands a year if not more. If you are fighting for your life, do you really care about the equity in your home?
I feel like there is an undercurrent in these pieces that folks either were foolish and did not save enough for retirement, or, took the equity to party in their golden years.
I know far too many older people in the reverse mortgage boat due to illness, whether they have health insurance or not. The numbers are quite unbelieveable for these life saving or life prolonging drugs. The bills can be coming in for years and years. Fuck cancer.
This is objectively false for the majority of the country btw. If you live in western canada (i.e. anything west of Ontario) you are covered. In Ontario it’s high, but is completely dependant on many factors. East of Ontario varies, but in Quebec it’s under 1k out of pocket, with the highest cost being in Atlantic Canadian provinces which total about half the population of the GTA and definitely don’t have a proportional representation of cancer patients. I’m pretty sure people are extracting home equity to cover the bills and maybe some unnecessary extravagance. I’m also certain many of these people are extracting equity to either help their children or further invest in other properties themselves. Unfortunately, prudent financial planning and management is challenging for most people and they’re being misled by their banks.
I think the only undercurrent here is that there is growing financial distress in society that has been kept out of sight by piling on all kinds of debt upon each other (and selling jewelry).
Notwithstanding the specific dire circumstances where there is no other option, I really doubt that anyone would seriously argue that a reverse mortgage should be considered as the answer to unexpected medical expenses. The problem is that given the prevailing spending habits such circumstances are apparently becoming more and more common occurrence. Many people got zombified that the only decision that they should make about their money is to spend all they have and can borrow to buy as much house as they can disregarding everything else including the possibility of unexpected medical expenses.
The basic utility of housing mutated into some equivalent of the magic wand that must be able to address every need from keeping the (personal and country) economy going to being a pension and a rainy day fund. This is so seriously screwed-up on so many levels and has so many negative long-lasting consequences that it is really astounding that this is not a national emergency. If anything, I think that it is important that BD keeps bringing attention to this topic so maybe things improve and more people would be able to avoid the situations where a reverse mortgage is the only available option.
One of the best comments I’ve read in awhile. Thanks MH. Tock. BD4L.
ditto!
Sumskillz
Very fair point that must be considered.
This is objectively false for the majority of the country btw. If you live in western canada (i.e. anything west of Ontario) you are covered. In Ontario it’s high, but is completely dependant on many factors. East of Ontario varies, but in Quebec it’s under 1k out of pocket, with the highest cost being in Atlantic Canadian provinces which total about half the population of the GTA and definitely don’t have a proportional representation of cancer patients. I’m pretty sure people are extracting home equity to cover the bills and maybe some unnecessary extravagance. I’m also certain many of these people are extracting equity to either help their children or further invest in other properties themselves. Unfortunately, prudent financial planning and management is challenging for most people and they’re being misled by their banks.
Nicely said.
To bad more people don’t think about the future. Instead of instant gratification.
Haven’t seen you in awhile, glad you’re back on the block cat! Tock. BD4L.
Good comment MY.
Just wish we had people like you in the Bank of Canada. They seem to think credit is the answer to everything.
Sorry I meant
M.H
Great Comments here- keep up the good work everyone