Canadians short on retirement funds may be turning to using their home equity. Numbers from Office of the Superintendent of Financial Institutions (OSFI) show that reverse mortgages experienced huge double digit growth in October 2017. That’s good news for reverse mortgage lenders, but bad news for a country increasingly addicted to debt.
A Reverse Mortgage?
Reverse mortgages are exactly what they sound like – a mortgage in reverse. People aged 55 and up, borrow against the equity in their home. They don’t have to repay the debt until they sell or transfer, which is ideal for consumers on a fixed income. It’s different from a Home Equity Line of Credit (HELOC), since there isn’t a fixed repayment term. Only one company offers these in Canada as of right now, CHIP by HomEquity Bank. OSFI numbers are a total, but technically all of this debt is held by just one bank.
Don’t get too excited, reverse mortgage lenders aren’t charities. You don’t have to repay until you sell, but interest quietly racks up while you don’t – at a pretty steep rate. The lowest posted reverse mortgage rate from CHIP is 5.39%, vs the lowest posted HELOC rate of 3.7%. That’s a 45.76% premium on a HELOC. A justifiable premium, since the lender has no idea when borrowers will pay them. It does slowly kill the borrower’s home equity, but that’s not their problem. That’s a problem for whoever gets the estate.
Reverse Mortgage Debt Grew Over 22%
Canadians are rushing in to draw on their home equity using reverse mortgages. OSFI filings show that reverse mortgages held at banks added up to $2.175 billion at the end of October 2017, a 2.02% increase from the month before. This works out to a 22.27% increase compared to the same month one year before. An increase that size works out to an average of $1.25 per second. Reverse mortgage debt could be the fastest growing segment of debt in the country.
Source: OSFI, Better Dwelling.
Reverse mortgage debt rising at $1.25 per second is definitely a trend to keep an eye on. As Canada’s population ages, more people that bought a home at the expense of saving for retirement will be looking to extract equity.
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