Canada

Reverse Mortgage Debt On Canadian Real Estate Jumps Over 44%

Reverse Mortgage Debt On Canadian Real Estate Jumps Over 44%

Canadian real estate owners have received a windfall lately, but unfortunately it’s all trapped in their home. Office of the Superintendent of Financial Institutions (OSFI) numbers show that an increasing number of homeowners are “releasing equity” through a reverse mortgage. The relatively new form of debt is rapidly growing, at almost 8 times the pace of regular mortgage debt.

Reverse Mortgages Are Mortgages, But Like… In Reverse

If you already know what a reverse mortgage is, feel free to skip to the next section. 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. OSFI numbers are a total, but technically all of this debt is held by just one bank.

Reverse Mortgages On Canadian Real Estate Spikes Over 44%

Reverse mortgage debt continued to spike across the country. The total balance of outstanding reverse mortgage credit reached $2.69 billion, a 0.84% increase compared to the last year. The 12 month increase is a whopping 44.6% rise, which is $832 million dollars. Pretty impressive growth for a segment of debt that didn’t exist a couple of decades ago.

Source: OSFI Filings, Better Dwelling.

If That Sounds Like Quick Growth, That’s Because It Is

Throwing around dollar numbers doesn’t quite give a sense of how large this number is, so let’s contrast it. The monthly gain of $22 million sounds like small potatoes, until your realize that’s net growth. To contrast, loans secured by real estate (such a HELOCs), fell by $451 million during the same period. The total balance is small compared to mortgage debt, but it is growing at 8 times the annual pace.

Source: OSFI Filings, Better Dwelling.

Expect This Segment To Continue To Expand

Despite the size of this market, it was run entirely by HomEquity Bank’s CHIP program, until this year. Toronto-based Equitable Bank is now offering the Path Home Plan in Alberta, British Columbia, and Ontario. The bank’s latest regulatory filings show they have no clients on book, yet. They’ve branded it an “equity release” program, so now seniors can “release” their equity into two different companies. Go on equity, you’re free now. Don’t look back.

Reverse mortgages represent a relatively small, but quickly growing segment of debt. As Canada’s population continues to age, this will likely continue to increase. It’ll be interesting to see what kind of impact equity withdrawal, and higher interest rates, will have on the general market. More important, what is everyone doing with this reverse mortgage debt?

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17 Comments

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  • C 11 months ago

    So who is on the hook for granny’s reverse mortgage when she croaks, and she owes more than her house is worth???

    • Bluetheimpala 11 months ago

      My understanding is that they offer so little that it would take a nuclear war for these guys not to make a massive profit at the end of 10-15 years. I need to read up a little more, might be good to take a long position in one of these lenders if this is where we’re headed.

      • Trader Jim 11 months ago

        Actually what I was thinking. Equitable sounds like a good pick if this is the game they’re going into. It’s a little predatory, but it’s going to be lucrative.

        • Alistair McLaughlin 11 months ago

          Equitable is also an alt-lender with vulnerabilities similar to Home Capital Group.

        • Grizzly Gus 11 months ago

          Need to look into this as well.

          I wonder what the interest rates will be compared to a normal mortgage or HELOC and how long you can lock in a rate. At 4-6% for example the value of the loan doubles in under 20 years. Do the banks have any ability at all to call in that loan and force you to sell?

          From banks perspective I think it would also be pretty hard to fund a large quantity of these deals. If no repayments happen for 10-40 years how do the banks fund new deals? Will probably need to figure out a way to bundle them up and sell them off.

          Depending on interest rates for these, if your are the heir to someone considering one of these and you have some equity or assets you can play with it might be in your best interest to take a HELOC out and just give that to your parents. At least keep the principal from growing year over year.

    • Trader Jim 11 months ago

      That’s the big question. I think at this point, they likely haven’t had to settle a loss. If the house goes down in value at death, the estate would likely have to settle the bill.

      I’m intrigued what it means when Boomers with $2 million houses, have spent a million in debt. Puts a lot of doubt on the great wealth transfer everyone is discussing.

      • MH 11 months ago

        This “wealth” is imaginary to begin with. For some reason many people bought into the idea that wealth is something that allows to take upon more debt.

      • Alistair McLaughlin 11 months ago

        Risk factors include:

        Granny lives way longer than estimated.
        Interest rates increase sharply, thus compounding faster than projected.
        House market value declines, erasing remaining equity.
        Estate getting tied up in court after Granny passes (very common), leading to several extra years of compounding and ultimately the amount owing surpasses the value of the home.

        I would assume these reverse mortgages include a clause in the fine print allowing the lender to force a sale in the event where equity shrinks beyond a certain threshold. Man, how would you like to be the employee who has to enforce that agreement? “Sorry Gramps, but you lived too long, we’re forced to exercise the escape clause and sell the house out from under you before you end up owing us more than the house is worth.”

        As a side note, my wife’s 80 year old uncle, who had owned (or should I say “owned”) the same home for over 40 years just had to sell it. He had been refinancing for years, and owed over $200K on a $350K house he purchased in the 1970s. He got to the point where his pension could no longer keep up with the payments. Whether he did a reverse mortgage or just regular HELOCs I do not know. From the way it was described to me (“refinancing” was the word used) it sounds like the latter. However, the example is instructive. If reverse mortgages become common, his predicament will also become common.

  • C 11 months ago

    https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reverse-mortgages.html?=undefined&wbdisable=true

    Last line in the website–not even the government knows.

    Oh and the US dealt with this four years ago when losses were in the billions due to falling house values and loan providers were looking for a bailout from the government.

  • Bluetheimpala 11 months ago

    Aren’t reverse mortgages predatory? Everything I’ve read about them suggests a slick sales guy can get a desperate old couple to hand over huge amounts of equity for as little as 50% of the value, maybe less. Sure the lender is on the hook and needs to make a profit but it is a dirty way of making a profit. Then again do I care if old people are stupid with their money? Not really. We’re all dogs eating out own puke at this point to. BD4L.

    • Investor 11 months ago

      If the so-called sales’ guys are doing it with full disclosure, yeah, there’s no need to worry about them. But if they engaged in unethical grand deception (like they did in the States), then, we should worry for these old folks. It could be my mom or your uncle being deceived.

    • Alistair McLaughlin 11 months ago

      Just because someone is “dumb” doesn’t mean it is OK to take advantage of them. No doubt some predators will do just that.

  • Bob 11 months ago

    The salient number is the percentage of the house’s current market value that is being loaned out. If it’s granny in Vancouver, taking out $200,000 against her house in Point Grey, then there is no risk. The house is still in the black for $4,000,000 when she passes, and everybody wins. The municipal government is effectively doing the same thing with property taxes to seniors.

    • Grizzly Gus 11 months ago

      Can’t see anything going wrong in that scenario, but a lower priced home where someone takes out a lot more equity (think max id 55%) could get pretty ugly depending on interest rate terms, and whether or not the bank is able to call in a loan or demand that an owner post more collateral if the LTV drops below 55%

      Please let me know if I am missing something here,

      Thinking of a more extreme scenario.
      – House prices crash by 30-40% over next 3 years
      – Home worth 1 million today
      – Borrower takes out the full 55% today at age 55 …. $550k
      – 4-6% interest rates for life of loan
      – Sells home in 20 years at age 75

      3 years from now home is worth 600-700k
      Not going to figure out the compound but 550 000 grows by 27,500 a year at 5%.
      So in three years debt is worth at least 632,000 K
      With 40% crash you are already under water.
      With 30% crash your debt is now worth 90% of the value of your home.
      Can the bank demand collateral or force you to sell? (Hopefully you still have a large chunk of that 550 000 in something liquid)

      Also, even if the bank cant call in these loans. If a big crash happens and if the value of the debt gets close to the full value of the home, you are now in a situation where you need the asset to appreciate faster than the interest build up. Presumably after a big crash prices would rise faster than 4-6% a year. But if rates go up there is a very strong chance that you have 0 equity left by the time you sell.

  • C 11 months ago

    I think the worst part of all of this is that reverse mortgages allow 2 old people to stay in a home they can no longer afford, taking away the potential for young families with two incomes to buy a house they can afford.

    What kind of society is this when millenials cant afford houses and live at home or are crammed into condos, while old people live in alone in huge houses incurring ridiculous debt.

    There’s your supply and debt to income problems all rolled into one….

    • Raging Ranter 11 months ago

      They’ll die eventually, and the house will be on the market. No one is obligated to move out of their home to make room for someone else.

      • C 11 months ago

        No, they are not obligated. But it seems pretty counter-productive to borrow against your home, and then pay interest on the debt.

        You only have access to a percentage of your homes value, and you lose even more through interest.

        Alternatively, you could sell our home, downsize and have money left over to help support your life. And since the sale is free from capital gains its tax free.

        Sell your home, and you enjoy 100% of the equity.

        Or reverse mortgage 25% of the value and watch the “equity” in your home being sucked away by interest payments and enjoyed by a predatory lender.

        Houses are not eggs, and sitting on them for longer than you should isn’t always the best choice.

        If you cant afford your life given your current financial circumstances, how in the world can anyone suggest taking out debt to finance this unaffordable life is a good idea?

        It’s not.

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