Canada’s house rich but cash strapped Boomers are back to tapping their home equity. Regulatory filings with the Office of the Superintendent of Financial Institutions (OSFI) show reverse mortgage debt hit a new record in February. Over the past couple of years, the segment had seen a slowdown. However, growth is now suddenly back and the balance grew by nearly a fifth in just one year.
Canadian Reverse Mortgage Debt
Reverse mortgages are exactly what they sound like — a mortgage in reverse. Seniors pledge their home equity in exchange for cash, either a lump sum or a regular payment. They’re like a home equity line of credit (HELOC), but with one big difference — regular payments aren’t required. Payments are generally only due in the event of death, default, or sale.
Since the lender isn’t sure when they’ll be repaid, they charge a premium interest rate. Regular payments aren’t needed but interest still accumulates, chipping away at home equity. Borrowers might want to repay the loan if possible, despite not needing to do so.
That brings up the benefits and risks for these types of loans. A positive is clearly being able to age in place, use your home equity, and not have to worry about payments. However, since seniors are past their prime earning years, too large of a loan can be tricky to pay back. Others might find when it’s time to sell, they accumulated much more debt than thought. It also becomes more problematic if there’s a downturn and they need to sell for some reason.
Canadian Reverse Mortgage Debt Hit $5.4 Billion
Canadian reverse mortgage debt reached a new record, and it’s moving briskly. The outstanding balance was $5.4 billion in February, up 2.0% (+$106.9 million) from a month before. Since last year, the segment has grown 18.3% (+829.9 million), drawing close to a billion dollars. During public health measures there was a major slowdown for the segment. Now that most measures are gone, it appears people are back to borrowing.
Canadian Reverse Mortgage Debt
Canadian reverse mortgage debt held by financial institutions.
Source: Regulatory Filings, Better Dwelling.
Reverse Mortgage Debt Is Back To Rising At 2019 Levels
The growth rate is the highest since the significant rate cuts of 2020. Annual growth in February was the highest since September 2019, reversing the slowdown. It’s hard not to notice the sudden acceleration from September 2021, since it’s such a sharp rise.
Canadian Reverse Mortgage Debt Change
The annual percent change of reverse mortgage debt held by regulated financial institutions.
Source: Regulatory Filings, Better Dwelling.
Reverse mortgage debt is expected to grow as Canada’s population ages. The sharp acceleration is a bit unusual though, especially considering the timing. Growth goes vertical as home prices and inflation begin to surge.
The increase can mean reverse mortgages helped capitalize the Bank of Mom & Dad. It can also mean seniors needed more funds to cover inflation, or it could just be hot tub time to celebrate a surge in home equity. In any case, these borrowers just committed to some pricey loans. Reverse mortgages are currently 6.99% interest for a 5-year term. If they averaged that rate for ten years without payments, the outstanding balance will have basically doubled.
I knew an elderly Lady who maxed out the equity in her home through Reverse Mortgages and the high rate of interest they charged. She lived in a big rotten old mansion in stylish Shaughnessy in Vancouver. The place was full of rats and she had buckets in every room to catch the rain.
I don’t remember ever hearing about these products back in 70’s, 80’s, or 90’s for that matter. Athough I am sure they were available for some – not as prevalent as they are today.
But I do know both my folks were “allergic” to any debt. They proudly paid off their 25 year mortgage in just 11 years – and trips to Disney and a new vehicle were also in our home’s orbit.
It could be their way of financial living was comfortably offset with the knowledge of my old man’s pension (he collects 80%) after 30+ years of work. There is no need for them to drain equity out of their house to live life comfortably.
Could it be the lack of funded (or self-invested) pensions that have created a mass HELOC/reverse mortgage addiction/need to live now in Canada for older folks?
Or is it there are some (many actually) have not financially prepared themselves for the inevitable of aging and retirement with the savings/pensions/ funds past generations were privvy to?
Maximum amount of reverse mortgage is 55% of home’s value. Suggesting a home is valued at $500,000 – taking out $250,000 – with 6.5% interest, in 10 years there will be $478,000 owed.
In any case, the longer homeowners who carry withdraw their equity live, the more dangerously close they will end up either having to sell to cover their debt or begin to repay their debt.
Not financially smart at all – and wanting today and paying tomorrow. Right in line with the beliefs of today’s world.
Reverse mortgages also serve a valuable tool for the segment of the population that cannot qualify for a traditional mortgage or Line of Credit due to their too low incomes to satisfy the stress test. Certainly the interest accumulates over time, but over the past few years the rise of house prices has helped to cover part or all of the interest.
Ahem, spell check, please. It’s not a “Reserve” mortgage as stated in the title. Thank you.
Oohhh, with rental prices going up in Vancouver: https://dailyhive.com/vancouver/renting-vancouver-increase-2022, and Vancouver being an amazing place to live, might as well bite the bullet and buy.