House rich, cash poor Boomers across Canada are sending reverse mortgage debt soaring. Office of the Superintendent of Financial Institutions (OSFI) filings show the balance of reverse mortgage debt made a slight decline in January. The monthly decline didn’t slow the annual pace of growth all that much. Outstanding reverse mortgage credit is growing at 10x the annual pace of regular mortgage debt.
What Is A Reverse Mortgages?
Reverse mortgages are a way for senior homeowners to tap home equity, without selling. Borrowers aged 55+ borrow their own home equity, and receive it as a lump sum or scheduled payment. The loan is kind of like a home equity line of credit (HELOC), but with a few key differences. The biggest one is payment terms, which allow borrowers to not make a payments. Repayment is generally only required in the event of death, sale, or a default on the home.
Sounds great, what’s the problem? This isn’t a public service, it’s more like a last chance loan. The interest rates are much higher than a HELOC, so you would only pick this option if repayment is an issue. Few or no payments mean your remaining home equity will get swallowed up by interest. Since we’re also near all-time lows for rates, the chances of rates climbing before your death is also high. That means your small loan could accumulate very quickly, while you’re on a fixed income. If you’re not planning on leaving anything to anyone, it doesn’t really matter. If you plan on leaving your home to a loved one or charity, you may want to consider your options before deciding.
Canadian Real Estate Owners Owe $3.5 Billion
Despite the steep cost, more Canadians are turning to reverse mortgage debt. The outstanding balance of debt reached $3.51 billion in January, down 0.82% from the month before. The decline still works out to a 30.44% increase when compared to the same month last year. Reverse mortgage debt is below the all-time high, but not far from it.
Canadian Reverse Mortgage Debt
The total of reverse mortgage debt held by regulated finacial instituitions, in Canadian dollars.
Source: Regulatory Filings, Better Dwelling.
Reverse Mortgage Debt Growth Is Tapering, But Still Huge
The annual pace of growth is slowing down, as predicted – but it’s still ripping higher very quickly. The annual pace of growth of 30.44% in January is smaller than the month before, and 31.7% lower than last year. That drop still leaves it rising almost a third higher in a year. Canadians have seen the balance of these loans double over the past 3 years.
Canadian Reverse Mortgage Debt Change
The annual percent change of reverse mortgage debt held by regulated finacial instituitions.
Source: Regulatory Filings, Better Dwelling.
The balance of reverse mortgage debt is still relatively small, but is growing fast. Even at the “reduced” annual pace of growth, seniors will accumulate another billion by next year. Considering the size of debt in Canada, it seems like a drop in the bucket. However, it’s still a sign that older consumers are turning to very expensive debt products. Not something healthy, diversified households typically do in retirement.
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I almost feel bad for people that don’t realize how little they’re going to have if home prices correct, and they’ve got a reverse mortgage, and HELOC.
My mom’s got a major bank loan she can’t afford on her fixed retirement income. I said sell the house back in 2017 when the problem first revealed itself. Her bank at that time convinced her to wait, told her she’ll get more for it in a few years….gave her a higher credit limit. Of course she used it. Flash forward to 2019. The loan has been called. Now my brothers and I have to regularly miss work to help with the mess in a very tight time window.
The borrowing and spending binge by Canadian households, businesses and governments (all levels) continues unabated. Growing the debt in the economy significantly faster than the economy itself grows seems to have developed into a way of life in Canada.
At the end of December, 2018 the total debt outstanding in Canada (bottom line of the Statistics Canada credit market summary data table) was $8.089 trillion. At the end of December, 2017 the total debt outstanding was $7.645 trillion. In the 1 year period from the end of December, 2017 to the end of December, 2018 it increased by $443 billion. This is an increase of 5.8%.
https://owecanada.blogspot.com/2019/03/canadian-total-household-business-and_14.html
I think it’s too complicated for most homeowners to understand that expansion of credit through non-productive investment leads to solely inflationary gains.
Which is great for your house, until you realize that your house is making more than you, because inflation isn’t being accurately captured by CPI. Now your wages don’t make sense in contrast to what your home is making, which means you need to further drive down the value of your wages/fixed income by investing in more housing. Except at some point you run out of a float, and that causes prices to rapidly vanish, and cause a monetary contraction.
We’re in for a type of broad weakness this generation has never seen, and only observed through TV shows when the US underwent it.
“expansion of credit through non-productive investment leads to solely inflationary gains” This is a great point JC and this is fundamental to the pain we are beginning to feel.
This bubble inflated wages in a number of industries but specifically skilled and unskilled trades. within the housing/reno/building segment. It is not uncommon for unskilled labour to get $40-60/hr (plus a number of perks) and skilled double that (granted there are higher costs associated with their equipment). This is great if the hourly reflects the true price/cost of the labour within let’s say a 10% delta however, when the underlying output is in a bubble the inputs (labour, land, materials) go up in step; and come down much more violently. Materials have an inherent value, so a 30% chop just means less profit for Home Depot. What happens when the builders layoff 30 of the workers and go into hibernation for 5-10 years? Don’t worry there is union! But the union has to place workers where there are no jobs or into jobs that cannot sustain the lifestyle to bubble contributed to. In a blink of an eye, a lot of these employees may go from living high on the hog (new trucks, houses, vacations, unlce tony lifestyle) to potentially not being able to cover their short-term obligations. This is scary and cannot be overlooked. Housing is not the stock market and I think we’ll learn a lot from this cycle. Oh…to the article…fuck reverse mortgages, they are the devil and anyone who says different is lying to your face.
Tock. BD4L.
Blue,
Maybe there is a positive for people looking to renovated their existing houses then? Cost of labor and renovating has skyrocketed along with the housing market so hopefully this will bring some of it down!
Could be but in Blue’s scenario that means we are already in a big recession. HELOCS limits probably get slashed, so will probably need the cash to fund the reno yourself.
Don’t say that to the Brotherhood Blue! You’ll get shot.
But seriously. I have a lot of family in some pretty solid union and they don’t seem to understand the union only finds you work if the union has work to give you.
If construction halts, you and your 5000 Brothers will be lined up to take 300 calls… The maths don’t work.
All I know is the information at hand.
70somethings who make a lot and owe even more. At 70something.
Given this is a real estate blog, and the numbers presented are presumably real estate related, I think it’s important that genuine readers who are more susceptible to suggestion than others be warned:
The presented comment from RE EXPERT EXTRAORDINAIRE is a lie at best. At worst, it’s a family who is blindly sold out their golden years for the–often millennial associated–instant gratification of credit.
But for all you know I could be a kook in an institution. YMMV.
Best comment of the year
How many of these reverse mortgages were used to raise capital for their kids to buy a condo?
This is one of the biggest problems IMO. People are using leverage upon leverage, so if one domino gets hit they all go. Regulators can’t help with prudential lending if households aren’t being honest about what they’re doing with the debt – which is speculating.
You know a trillion here, a trillion there, eventually we’re talking about real money. Well, real fiat money.
What’s the frequency of the evaluation of the value of the underlying property? At what LTV value do the mortage holder pulls the plug, do they wait until they’re underwater?
There’s going some rough awakenings on people that expected their 2M$ bungalow to be worth 4M$ in 2021.
I looked into it myself. If you have a reverse mortgage it can go as low underwater as possible and you still get to keep your house and the money you pulled out as long as you don’t sell or move out. So basically if you pulled out enough cash to last until you die you can keep living in that house but you gotta stay there.
The loan is non-recourse. It means that the bank is stuck with the loss. However if the succession was counting on that money to pay off their own mortgages and retire on it they’re SOL, doubly so if they’re underwater on a regular recourse mortgage on their own home. Ie they bought a house way more expensive than they could afford because the inheritance would fix that problem down the road, presumably with money down taken from their parent’s equity.
Chris- Why
I agree in the sense there is typically grammatical/spelling slip-ups in BD’s articles.
But to the same token, does it really matter? I mean, we’re all adults looking for stats and data here, not an English major to regurgitate someone else’s thoughts. So… does it really matter?
Is heloc not better than reverse mortgage
In case some of you missed this. Interesting to hear him selling short Canadian banks.
https://smallcaps.com.au/the-big-short-steve-eisman-gfc-canada-housing-market-australia-next/
And btw, friends don’t let friends take out reverse mortgages. Stop them!
My advice to young people for this cycle is save some cash. don’t buy real estate for 2 years. We never had a correction in 2008 which was a bad move. We have tons of unskilled labor making temporary unsustainable wages. Which in relative term push down skilled labor’s purchasing power through inflation, which CPI don’t capture because housing cost is not honestly reflected there. Like I said before, if you have the choice skilled young Canadians should leave Canada before you have more competition when the market crash. Be smart about planning, this dumb government will try to prop up housing prices. there is no future for young Canadians here.