Canadian seniors short on cash, but rich in property are drawing on home equity at an alarming rate. Bank filings with the Office of the Superintendent of Financial Institutions (OSFI) show September saw mid-double digit growth in reverse mortgage debt. The type of debt, which services seniors, is set to see continued growth well into the future.
Reverse Mortgages
If you already know what a reverse mortgage is, feel free to skip this. For those that don’t, a reverse mortgage is a way for seniors to tap their home equity. Senior homeowners borrow equity in their home, and receive it in a lump sum or scheduled payments. The equity they borrow can be paid back, or not – depending on how much you want to see disappear. The loan is designed so the borrower only has to pay it back when they die, sell, or default on their mortgage.
Sounds good, right? The big problem with these loans are they have interest rates much higher than a HELOC. Combine that with borrowers that aren’t making payments, and their equity disappears fast. That’s before you consider that we’re just off of all-time lows for interest rates. Recent borrowers could see the rate of interest rise substantially by term renewal.
Canadians Hold Over $3 Billion In Reverse Mortgage Debt
The balance of reverse mortgages printed a new all-time high. Bank filings show over $3.07 billion in reverse mortgage debt in September, up 1.16% from the month before. The increase represents a massive 43.98% increase compared to the same month last year. Part of the jump is due to National Bank acquiring over $427 million in reverse mortgage debt in November 2017. Previously it does not appear this debt was held at an OSFI regulated bank.
Canadian Reverse Mortgage Debt
The total of reverse mortgage debt held by regulated finacial instituitions, in Canadian dollars.
Source: Regulatory Filings, Better Dwelling.
The growth rate is ridiculously high, but has been coming down. The 43.39% is slightly higher than the month before, but down from the peak 46.32% hit in February 2017. The rate will likely drop to the mid-20s in November, as growth stabilizes against the sudden rise. That said, 20+ percent growth rate is still very, very high.
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 growth comes as real estate valuations are past peak, and rates are on the rise. Combine that with borrowers encouraged not to payback the loan, and household wealth is set to disappear. Resisting cashing out and downsizing sounds very expensive.
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Resisting downsizing when you run out of money is peak moron behavior.
LOL
I think most people resist down sizing-not just seniors.
Credit cards, HELOCs, 2nd mortgages, reverse mortgages, pay day loans…
People will bury their families in debt, just to keep a house, and then turn to insolvency to fix their debt problems.
Its too easy to get into debt these days.
Just ask my credit card company. They would like me to have a $20000.00 limit. I currently have a limit of $7000.00 and a balance of just under $500.00, and it will be paid off this week–it was charged last week on Black Friday.
How many readers, Bears and Bulls, have maxed out credit? I’m guessing a lot.
Don’t be condescending.
Not necessarily so Trevor…there is good debt and then there is “moronic debt”. If you can tap into your home equity to pay down higher costing credit card debt without incurring the costs of selling and moving, and you have the discipline to then resume mortgage payments, I’d say that is a good move. Iin the 3 or 4 large cities where most Canadians live, what are your downsizing options? After incurring all the costs of a move, you are likely even worse off.
You’re partially correct except that reverse mortgages typically are for seniors to fund their retirement. Not to pay back a credit card debt. There are far better loans (HELOC) to take if you just want to consolidate credit card debt. A reverse mortgage is sort of like selling your house to the bank and having them pay you monthly while you still live there.
I agree with lowering interest on debt, however I think many people who’ve gotten themselves into this position would be in the “moronic debt” category.
Totally agree that it makes sense to consolidate debt into lower interest vehicles.
I understood Trevor to be referring to the implied cost of living in an oversized house even when it is fully paid off, aka maintenance, property taxes, and opportunity cost. If homeowners are struggling to make ends meet, the best defence is to downsize your home as this is typically the largest monthly expense one faces. It is dubious to continue to draw on equity in the hopes asset prices will continue to rise.
Ah the Boomer, the most selfish generation. Apparently they’re on track to be the first generation in history to not leave anything to their young.
https://www.seattlebusinessmag.com/blog/baby-boomers-may-be-first-generation-not-pass-wealth-children-survey-says
yes, with the gov’t stealing our wealth and reallocating it to the wealthy, not much left to go around
Except the survey was for “adults with $3 million or more in investable assets, not including the value of their home. ” Which means there would be tons left to go around. Nice try though 🙂
“About half the parents have not fully disclosed their wealth to their children, and 15 percent have disclosed nothing about the family wealth. Among the reasons parents cited was fear that their children would become lazy (24 percent); would make poor decisions (20 percent); would squander money (20 percent); or would be taken advantage of by other people (13 percent).”
That is, half are worried their children will become Baby Boomers.
Bank of Canada is expanding to bail out mortgages again. Feels like 2008 all over again.
https://www.bankofcanada.ca/2018/11/expansion-assets-bank-canada-will-acquire-balance-sheet/
“As part of these changes the Bank plans to allocate a small portion of its balance sheet for acquiring federal government guaranteed securities by purchasing Canada Mortgage Bonds. These purchases will be conducted in the primary market, on a non-competitive basis, and are expected to commence in the latter part of 2018 or in the first half of 2019.”
In regards to it feels like 2008 again
https://business.financialpost.com/news/fp-street/did-canadian-banks-receive-a-secret-bailout
TLDR
“The Harper government stepped in and used a number of measures to free up money for Canada’s banks during the financial crisis — including buying mortgage-backed securities and providing short-term loans.
All told, the study counts $114-billion worth of guarantees and financial aid for Canada’s big banks from October 2008 to July 2010 by the Bank of Canada, the United States Federal Reserve, and the Canada Mortgage and Housing Corp.”
I just got around to watching the movie: too big to fail, last night. I’d been avoiding it since I bought a copy a few years ago, heard this news, and thought what the hey?
Very, very, scary stuff.
Question: What accounts for the huge run up in Q4 2017? Were seniors using Reverse Mortgages the same way others were using HELOCs – to fund direct second property speculation, or “invested” with sub-prime lenders?
If the answer to this is yes, then the compound risks / moral hazard facing our financial system are astranomical and the regulators have been totally asleep at the wheel – quite scary.
LOL. You people have ZERO concept of time, thinking everyone bought at 2017 highs. Calling others morons, when you should be looking in the mirror. Why don’t you use some common sense??? I’ll help you guys out. If these are seniors, are they likely to be carrying a mortgage? If you answered no, we can move on. If not, keep renting and hope for a 50% crash. Now, reasonable to assume that if they don’t have mortgage it was at least 25 years ago. So, what we’re house prices back then? Maybe 20% or less of today’s value? Just throwing out numbers but I think it’s a fair assumption, actually will be lower the further back you go, especially considering back then most homes were built on prime property closer to downtown. Ok, so if they are sitting on that much equity, do you think they care? They are essentially just using some of the equity appreciation. No different from a senior drawing from their portfolios by selling stocks/bonds to fund their spending. Honestly, use some logic.
Sorry not the same.
The equivalent would be to borrow against a stock/bond portfolio.
Repeat after me you can not have a asset and the cash at the same time.
If you are you are adding leverage and subsequently more risk.
Two concepts would be helpful. But I bit beyond the scope of this post. Sequence of returns and Monte Carlo analysis.
No one should call anyone else a moron. This is true we all have blind spots. But, I really hope SCE is not a real estate or finance professional.
Ha. I’m a finance professional, I also don’t care if you rent or buy. I first came on here to have an intelligent conversation, but the bears here are always insulting anyone who has anything positive to say. Well, if we have one stat to tell who’s right or wrong, it’s prices, and it’s been stable to up. So anyways, will leave it up to you to see if who’s right or wrong. I really don’t care.
Not being able to have assets and cash at the same time? Where are you pulling this from??? This happens all the time everywhere.
Also, BD has this amazing ability to make people on this site believe the world is falling apart. Do you realize how small $3b is in the context of the Canadian population? It’s hardly a cause for concern.
Tick Tock. BD4L!!!!!!!!!!!!!!
The loudest people are usually loud because their points don’t come across very well.
You are delusional for your own profits to think this market can sustain itself.
A shallow thinking finance professional — how could that possibly end badly?
Prices are up! All is fine! Nothing to see here! Seniors are mortgage-free on prime properties close to downtown! Loaded, I tells ya!
SCE,
You are making a lot of assumptions here as well. There have also been a lot of boomers who have chosen to give their children $200,000 down payments out of the equity of their homes. I agree $3 billion in the context of the number of boomers out their isn’t much but many of them in their 60’s still have a mortgage. They are too stubborn and seek comfort and familiarity in old age to downsize is all it is.
By the way, once a market turns it takes several years to form a bottom. Just because things appear stable in some markets doesn’t mean the coast is clear and back to how things were before. I still suspect we will be in recession in two years and the housing market will bottom two or three years after that.
Not really surprised.. my years of experience in capital markets have showed me working in finance doesn’t mean you know it or you are smart.. the sad reality
Sure
I hope your right and we don’t learn the difference the hard way.
Bear or Bull it doesn’t matter….. BD is sensationalizing a bit but the market is unsustainable any way you cut it. High debt levels in any economy is a concern with such low unemployment and one asset class* accounting for a fifth of GDP.
When or if an external shock comes we as Canadians have limited options to address it. Every asset class contains morons, prudent investors, the lucky and the unlucky. No use debating it on a blog just enjoy the cycle lol
*Real estate related industries
“Part of the jump is due to National Bank acquiring over $427 million in reverse mortgage debt in November 2017. Previously it does not appear this debt was held at an OSFI regulated bank.”
Thanks for digging up that information Daniel. It was missing from the last article on the topic and IMHO it’s very important and relevant to the topic because there was no explanation on the sudden jump.
Is 3 billion in the context of the Canadian population not about one hundred dollars a person?