Senior Canadian real estate owners are tapping equity at a breakneck speed. Office of the Superintendent of Financial Institutions (OSFI) filings show reverse mortgage debt posted double digit gains in July. Actually, they’ve been posting double digit gains for nearly 6 years. Within the past year however, those gains have doubled.
Reverse mortgage is just like a regular mortgage, in reverse… except your bank still comes out way on top. House-rich, cash poor Boomers can get cash secured by their home equity. The loan is kind of like a home equity line of credit (HELOC), but you don’t have to make payments. Instead, the interest can quietly rack up in the background, whittling away at your equity. It’s not a great idea, but it’s a compromise for staying in your home and you’re short on funds.
Canadians Racked Up $3 Billion In Reverse Mortgage Debt
The total balance of reverse mortgage debt hit a new all-time high. The balance reached $2.99 billion in July, up $29.74 million from the month before. That works out to a massive 45.32% increase from the same time last year. The overall size of the industry is still relatively small, but the rapid growth could change that in just a few years.
Canadian Reverse Mortgage Debt
The total of reverse mortgage debt held by regulated finacial instituitions, in Canadian dollars.
Source: Regulatory Filings, Better Dwelling.
Dat Big Ole’ Growth
The growth rate wasn’t a mistake, it’s actually that high. The 45.32% is just off of peak growth, but has stayed within a point’s range since November 2017. This time last year, the annual pace of growth was less than half of today’s rate. The growth rate is very high, even for an industry that’s seen rapid expansion over the past few years.
Canadian Reverse Mortgage Debt Change
The annual percent change of reverse mortgage debt held by regulated finacial instituitions.
Source: Regulatory Filings, Better Dwelling.
If you can do math, you probably already see the problem that’s brewing. The short-term rates on these are about 6% right now. At that rate, the reverse mortgage debt would double every ~12 years. Rates are also just off of historic lows, meaning the servicing costs are likely to rise in the future. This assumes borrowers don’t withdraw more money in their golden years.
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Far from bullish on real estate with interest rates rising, but schemes like this will keep Boomers in their home longer than previous generations.
It also means people are over estimating the amount of wealth that will be transferred to the next generation. That’s $3B scalped, growing at a rate of 45% per year.
Plus future additions. The second bank to offer reverse mortgages just appeared on the market, which means there might be demand beyond it being a product with limited consumer interest.
Grandpa still has enough money to go around in the GTA. If average Toronto detach is 1.3M, they can leave 300k for their estate and still have 1m to play with.. and they get to stay in their house too. How good is that? Not like you’re going to move anywhere else in the GTA anyway.. everything is expensive and all the best hospitals are downtown. That’s important for seniors.
Grandpa doesn’t have a cent to his name outside of his home value if he is considering one of these. Lets hope values hold up, or as he ages further he doesn’t change his mind and decide it would be easier for him to down size.
What happened in Canada that November rose so quickly?
Canadians lost their mind, that’s what.
Kidding, but people are suddenly interested in the value they can extract from their home when the market gets bubbling. They don’t break it down by region, but I wouldn’t be surprised to see the coasts having a higher utilization rate.
The math on regular payments for a reverse mortgage are astronomical. Let’s say you take out $12k year, for 25 years. You will have received $300,000, and paid $449,379 in interest at 6%. That’s a hefty price for failing to diversify your investment early in life.
Buy a house, but don’t over extend yourself. Overextending includes not being able to make healthy contributions to your diversified investments.
Plus, 6% is only the 1 year rate. If you’re doing a reverse mortgage, you’re probably not planning on paying it back. When interest rates normalize, those rates will have to as well. If rates don’t normalize because of an economic crash, you lose more home equity anyway.
Sooooo they’re literally sucking equity out of their homes. What you said, “they don’t plan on paying it back” – harsh reality…then what happens when they die? I guess the bank re-possesses the house and has to sell it off to recoup the value? What a scheme. (Not that the bank didn’t already possess the house). Unless they have children who stand to inherit – but then they inherit just part of a house with outstanding interest payments, which they might elect to sell off anyways, because why pay a mortgage on another property that you expected to inherit in full. Interesting.
Nothing wrong with this.. what else are you going to do with massive amounts of equity ?
Do the bears realize how much OLD money there is in the GTA? There are so many seniors holding 6- 7 figures in equity that is otherwise unproductive.
At least they are making use of it and spending it somehow.
I know if I had 7 figures in equity with nothing else do to, why not spend it?
Although a cheaper way is to just get a HELOC .. but I guess they don’t care when they have so much equity anyway.
Good grief, you get fleeced for a reversed mortgage. Downsize or relocate if you want to access that money. Otherwise you’re essentially adding a premium onto the cost of consumerism.
You know Grandpa has so much equity, they can start balling out like they do in those rap videos? lol
Jokes aside I personally know seniors that made 7 figures plus , and they never flipped or speculated. Just hold over 30-40 years. Insane growth.
It must be slow days at the real estate office lately. You are all over the real estate blogs lately.
May I suggest finding a productive hobby while listings aren’t moving. Being a real estate shill must get tiring, especially in this environment. I will tell you what, I’m tired of reading your nonsense about people you know or what you think is going on. Reality is very different.
**Cue nonsense realtor rebuttals written in a primary school level of language.
Does anyone know if these loans can be called in or turned down at renewal if you go underwater?
Good question. I’m not sure. Since it’s only small players offering those the terms can be very brutal.
It can be much worse than that.
What’s a better way to fund a funeral? HELOC or no medical Life Insurance? A lot of seniors in my family have a paid off house, nice pension but no other financial assets and little in the bank. They had a tidy sum in the bank at retirement but it got whittled away over the decades. Life insurance probably lapsed long ago when folks lost faith they’d be paid out. Spouse passes and then all hell breaks loose financially, so it seems when we get to arranging the funeral. Big family funerals seem to average about $20 000 these days…though I have been to some that are far above that. Psychologically it is an odd time to run up the tab you owe.
Sounds like they should have invested their money. Expecting to survive retirement with only a paid-off house in your name and a measly CPP and OAP is not exactly a recipe for success…
Live within your means, buy a smaller house, and invest your money. A balanced approach is the best approach. COMMON SENSE!
They were doing fine until de-industrialization hit in the 1980’s, work disappeared and company pensions got hammered into bits. Life is not so predictable.
That’s really no excuse for living beyond your means. Save. Don’t spend it all. Sure, an Audi is nice, but can you live in it?
This is quite a stretch. Living within your means for many is living hand to mouth, especially during hard recessions like in the 80s.
If you don’t know this you are just some young know it all jack*ss who knows nothing.
Get off your high horse.
Big funerals costing $20k? I’m not sure where you’re getting that information but a simple cremation and few hour visitation is $8-15k … an actual large family funeral with everything easily starts around $40k… I mean caskets alone are over $10k.
In Vancouver, I know of a retired parole officer who lives in an $8,000,000 Kerrisdale house. He never made much salary, nor did his wife. The house was purchased for $250,000 with a lot of help from their parents at the time. To me, it makes a lot of sense for them to spend a few hundred thousand of their equity while they are still young enough to enjoy it. Their children still stand to inherit many millions.
Parole officer??? How much of that was dirty money slipped to him for looking the other way, hahaha.
Millions on paper… unless the value plummets and the rest is eaten up by interest… your comment is purely speculative, just like a completely bearish comment would be. If they want to leave their lives and estate to speculation than yes, they can go ahead and do this.
You are missing the point. Canada is homes to thousands of working-class people whose homes are now worth many multiples of their lifetime earnings! Think about that for a second. In 40 years working, most of these people didn’t earn $2,000,000 combined. And now they are sitting on multiples of that in house value.
Why shouldn’t they enjoy an enhanced lifestyle if all it costs is a few % of the paper value of their home? Even if the market drops 30% they can still enjoy some money today and leave a huge estate to their heirs. I think articles like these are missing out on the true scope of the gains seen in Canadian (at least Vancouver area) RE over the past 20 years.
No, you are missing the point. A house is not an ATM and debt incurs interest.
If they want to take money out they should sell the house, invest safely, enjoy earnings paid to them and not pay interest on a loan.
Repeat after me. You can not have your cake and eat it too.
You can not own an asset and the cash value of it at the same time. If you want the cash you need to sell the asset.
If you want the cash and the asset you will need to pay someone else for that privilege.
If you borrow against an asset and the interest goes up and the value of the asset goes down you will have a major problem.
We’re talking about Baby Boomers, Jimmy. They have ALWAYS had their cake and eaten it too. Always. Especially in Canada.
Why should they expect differently on this issue?
In the case of someone passing away… if they had a reverse mortgage and house prices dropped, so there was negative equity on the home, would their family be responsible for those debts?
The loan to value limits are very conservative, they know what they are doing. If you are 65, you can tap around 35% of your homes value. It goes up the older you get, maxing out around 45%. It ould take a fairly large crash, doomsday type where we are all hooped
According to CHIP. Home Equity Bank. The answer is no.
If the Home Equity goes insolvent not sure what would happen.
Just case you were wondering the company is not public so you can not take a short position.
I’m not sure if anyone here watches the federal reserve statement, but he quite literally just answered a question about exuberance… and answered that the primary concern is when they see people in large numbers start to borrow against assets that can depreciate, as usually this is when a housing bubble is about to collapse, although the this is not currently happening in the US.
This info came across my desk today. Figure this out:
A health professional purchases an Oakville townhouse in 2008 from the developer for $430k.
In 2014, big 5 bank takes a first mortgage for $850k.
In 2014, private corporate lender takes a second mortgage for $200k.
In 2017, individual private lenders take a third mortgage for $95k.
In 2017, another individual private lender takes a fourth mortgage for $45k.
In 2018, another individual private lender takes a fifth mortgage for $30k.
In 2018, another individual private lender takes a sixth mortgage for $50k.
In 2018, another corporate lender takes a seventh mortgage for $300k.
The townhouse next door sold in 2017 for ~$900k.
Make sense to anyone?
Oh ya, I’m sure everything is fine here.
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