More Canadians turning to reverse mortgages amid savings crunch
"People are living longer, they haven’t saved enough, and now inflation has made the cost of everything more expensive"
An increasing number of Canadians appear to be tapping into their homes for extra cash.
HomeEquity Bank reported on Wednesday that reverse mortgage originations topped the $1 billion mark in 2022 for the second year in a row.
“The interest in reverse mortgages is growing as more people look for options to finance their retirement and they are recognizing their home can be part of their retirement plans – both to stay in the home they love and also to meet their financial needs,” said Vivianne Gauci, a senior vice president and chief marketing officer at HomeEquity Bank, via email.
“People are living longer, they haven’t saved enough, and now inflation has made the cost of everything more expensive.”
A reverse mortgage allows homeowners who are 55 years and older to access up to 55 per cent of their home’s value and receive that money through a lump sum, instalments or a combination of both. The loan value and interest is repaid when the home is sold or the homeowner dies.
HomeEquity’s originations in 2019 and 2020 were $820 million and $830 million, respectively. That surpassed the $1 billion mark in 2021 and 2022.
The company said it had a record number of new customers last year.
Reverse mortgages have their advantages. They allow owners to “age in place” for longer, provide extra income and there are no monthly payments since the loan and interest are repaid upon selling the home. The additional money from a reverse mortgage also doesn’t impact government benefits such as Old Age Security or the Guaranteed Income Supplement.
However, they come with high borrowing costs of seven to nearly ten per cent.
“Reverse mortgages devour home equity at today's rates,” said Rob McLister, a mortgage specialist and editor at MortgageLogic.news, said in an email to Yahoo Finance Canada.
“The soaring cost of living, undersaving for retirement, homeowners' equity buildup (until recently), demographics and aggressive marketing have been rocket fuel for the reverse mortgage business.”
He suggests seniors take a look at alternatives but acknowledged many don’t have a choice.
“Problem is, most reverse mortgage customers who want to stay in their homes don't have better options. They can't get approved for lower-cost financing, don't want to bring in a renter and have no other assets to sell,” McLister said.
HomeEquity Bank and Equitable Bank are the only institutions in Canada that offer reverse mortgages. HomeEquity’s reverse mortgage portfolio is the biggest at over $6 billion.
For homeowners approaching retirement who don’t have enough savings built up, McLister recommends they moderate their spending and/or set up a home equity line of credit (HELOC) while they’re still working and their income is higher.
“In the right circumstances, HELOCs can save house-poor cash-needy retirees thousands versus reverse mortgages. And when the time comes, they can be refinanced into a reverse mortgage if necessary,” he said.
“The key is not to run up a HELOC balance more than 75-80% of what you could get in a reverse mortgage refinance.”
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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