Canadian seniors extracting home equity is slowing, but still growing at a high pace. Office of the Superintendent of Financial Institutions (OSFI) filings show the balance of reverse mortgages hit a new high in July. The 12-month rate of growth remains unchanged from a month before. However, the month before was still a very large number.
Reverse Mortgages
Reverse mortgages are a type of home equity loan, designed for house rich, cash poor seniors. Also called an “equity release,” the homeowner receives either a lump sum or payments over a period of time. They’re similar to a home equity line of credit (HELOC), but regular payments aren’t always required. Instead, the only time you need to pay the loan back is in the event of death, default, or sale. Otherwise, if the loan is in good standing, you don’t have to worry about it for a long time.
Just because you don’t have to make the payments, doesn’t mean you shouldn’t try to pay it off. In exchange for the lack of regular payments, you pay a much higher rate to borrow. The longer the loan is outstanding, the more the interest compounds. Equity you’ve accrued, slowly gets worn down the longer the loan remains outstanding. Compounding interest might leave you with a lot less equity than expected. Some seniors don’t have other choices, and use these as expensive retirement plans.
Canadians Owe Over $3.7 Billion In Reverse Mortgage Debt
The balance of reverse mortgage debt reached a new all-time high last month. Filings show $3.78 billion in reverse mortgage debt outstanding in July, up 0.98% from the month before. The balance is just over 26.24% higher than the same month last year. Over the past year, reverse mortgage debt increase by over a quarter. That’s huge growth for any segment.
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 slowing, but it’s still one of the fastest (if not the fastest) segments of credit growth. The 26.24% growth is a hair under the rate seen the month before. That would make it the slowest rate of growth since October 2017. It sounds slow, but it really isn’t. Slower than last year, sure – but the 25%-plus growth is still very, very large.
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 growth is slowing down, but is still moving very quickly. At this pace, the outstanding balance would still double every three years. That’s not exactly what people picture when they think of slowing growth.
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Stalling right when mortgage debt began to reverse direction looks like the bank of mom and dad are firing up the loan department again.
Or the bank of mom and dad are the buyers. Those aren’t millennials soaking up those “investment” condos being pitched.
Boomers didn’t save anything for retirement, so the only strategy is becoming landlords. If there’s a catastrophic shift to another region though, look out. LA or SF style outflows will inevitably come if there’s even a slight slow down in wage growth.
Great piece on how the intergenerational wealth transfer won’t occur in advanced economies for the first-time in history. Not that previous generations left a lot, but that little boost was usually enough to keep things flowing.
https://www.bnnbloomberg.ca/america-s-millennials-are-waking-up-to-a-grim-financial-future-1.1096460
Bigger issue IMO is going to be the government’s lack of ability to properly capture inflation. I make 3x what my parents did 20 years ago, and can buy maybe half the number of things? 30 years ago, you didn’t even need a second income to buy a house and raise a family in Canadian cities. Now you need two six-figure incomes just to get a one-bedroom, with fees coming out the nose.
I agree that real income is deteriorating and will continue to get worse but to say that “Now you need two six-figure incomes just to get a one-bedroom, with fees coming out the nose” is exaggerating unless your one-bedroom is in Yorkville. 😛
Something happen around 2017. Graphics shows this rapid vertical raise. Something important and major broke down in Canadian economy. It looks like the senior people or baby boomer run out of money all at the same time. Really weird. Look like something major happen.
Yes, in Oct 2016 the government implemented B-20 which the mortgage stress test is part of. It made qualifying for conventional mortgages more difficult and as a result, people who have lower income (think retired people on pensions) did not qualify for a LOC or mortgage. A reverse mortgage qualifies the home owner on the equity in their home, not on their income.
Clickbait title much?
This has nothing to do with anything other than people using what they have while they have time left in their lives to use it. No one lives forever.
Nor does the equity.
What’s your point?
If you think seniors care about their equity more than enjoying the remaining years of their lives on their own terms, you are sadly mistaken.
The comments on this site is full of simple minded people solely focused on some impending doom. It isn’t going to happen. You will see a Canadian peso and a lower standard of living before you see any real erosion of property prices.
When seniors’ only plan for retirement is to borrow from the shark loan lenders to survive while hoping to die before they run out if equity, it means that society has gone off the rails and will pay a heavy price. But this point is apparently too simple for your complex mind that is way too busy counting profits it brings you.
Are you entirely sure you understand what debt is?
What to do then?
Be very careful, this isn’t free money. If you don’t have separate investments for long term care you may want to reconsider. In Ontario the rates for long term care are published on the government’s website. Decide if you want to share your bedroom in a basic plan, share your bathroom in semi-private or have space to yourself in private. Private costs approx. $3,000 per month.
You could be effectively selling your home for 55% less.