Cash poor, house rich seniors are driving reverse mortgage growth across the country. Filings from the Office of the Superintendent of Financial Institutions (OSFI) show reverse mortgages are still printing huge growth in March 2018. After a single monthly decline in February, outstanding balances are back to climbing higher.
Reverse Mortgages
If you’re unfamiliar with reverse mortgages, they’re a method for seniors to tap their home equity. If you’re above the age of 55, you can take out a reverse mortgage, and get a lump sum or payments of the equity you’ve built up. The interest on the loan racks up in the background, killing what’s left of your equity. The upside is you don’t have to make any payments unless you move, sell, or default.
There’s only two companies that offer reverse mortgages, HomEquity and Equitable Bank. HomEquity Bank’s CHIP has the lion’s share of balances, being the sole provider until 2018. Equitable Bank reported the first reverse mortgages on their books in February. The latter has less than a million in reverse mortgages, so it’s not exactly a major player at this point. That said, this industry is fast expanding as Canada’s population ages.
Canadians Owe Over $2.4 Billion In Reverse Mortgages
Reverse mortgages continue to expand in balances. The balance of reverse mortgages was $2.404 billion at the end of March 2018, up 2.44% from the month before. This represents a 24.57% increase compared to the same month last year. The balance is relatively small in contrast to other types of debt, but the growth rate is very high.
Canadian Reverse Mortgage Balance
The balance of reverse mortgages for March, held at OSFI regulated banks. In Canadian dollars.
Source: Regulatory Filings, OSFI, Better Dwelling.
The Balance of Reverse Mortgages Doubled Over Four Years
Reverse mortgage growth has maintained double digit annual growth for over 7 years. The 12-month increase of 24.57% was the largest rate of growth for a March in over 7 years of filings. This growth rate is the highest observed, except for a 3 month pop from November 2017 to January 2018. The balance doubled over just 4 years, but at the current pace it would double over just under 3.
Canadian Reverse Mortgage Balance Change
The 12 month percent change of reverse mortgage balances.
Source: Regulatory Filings, OSFI, Better Dwelling.
Canada’s aging population is increasingly turning to reverse mortgages, to help ends meet. The combination of encouraging no-payments, and high interest rates, is a recipe for wiping out a huge amount of equity, over a very short period of time. Great if you’re in a pinch and need some cash. Not so much if you were hoping to leave your kids anything.
Like this post? Like us on Facebook for the next one in your feed.
Woah. Run the numbers on that.
If you take out the 55% max and your home value stays flat, your equity is toast in 10 years. This assumes rates stay the same, which they aren’t – they’re climbing. Why don’t people sell their homes, downsize, and use their equity? Sure, you don’t get the big house, but you also get to give your kids something. Actually, you might be better off renting at that point.
This is why I hate hate this whole look at the equity everyone has narrative being pushed. There’s a lot of gaping holes, between reverse mortgages, HELOCs, and refinances. The value of homes isn’t being driven on fundamentals, it’s because people that should be selling have vanity equity.
That’s true, it will be a big question which loans will be paid fist in case of bankruptcies.
We may end up in a situation that there are more claims on the property than equity in it and it will screw all risk planning done by those lenders.
I know for a fact that you can have mortgage + car lease amount totaling more than your property is worth. Add 2nd mortgage to the mix and you are underwater even without any price declines or rate increases.
Selling/downsizing and renting is the best solution for people thinking about doing reverse mortgage. They need to get over the sentimental value of their home first. No shame in doing that. They can rent or downsize to smaller place and live confortably. No such thing as a good deal.
Ed: “Selling/downsizing and renting is the best solution for people thinking about doing reverse mortgage. They need to get over the sentimental value of their home first. No shame in doing that.”
There certainly is nothing wrong with renting, contrary to what TREB would have you believe.
One hurdle to downsizing common sense might be the psychology of bubble market science fiction numbers.
Say you bought in the mid 90s for $300K, based on fundamentals the house should now be worth
maybe $500K, and you could sell and buy a condo for half that, it would seem like a reasonable deal. You end up with maybe $200K.
But when your house is worth $1million and you have to pay $750k for a krappy condo, or the equivalent in rent, you end up with what in relative term seems like a paltry $200k.
Off topic, but it’s a good thing the US learned its lessons from the sub-prime debacle, and will never repeat it:
https://www.bloomberg.com/news/features/2018-05-24/small-time-bankers-make-millions-peddling-mortgages-to-the-poor
Enjoy your day. 🙂
“Incentives trump ethics every time” – Steve Eisman
https://m.youtube.com/watch?v=NJodqhzqPKQ
These are government-insured mortgages. Imagine if CMHC did that up here? Mortgages are so political in the US. Both right wing and left wing politicians in the US place a premium on making home ownership available to the masses. (Remember George W’s “ownership society”?) For many Congress members and Senators, both Dems and Reps, making mortgage credit available to impoverished people who have no hope of paying it back is their favoured method of virtue-signalling.
“Quantitative Easing was a failure … they didn’t invest in the economy”
And that’s in the U.S., where arguably QE prevented financial armageddon.
There used to be potions in African to counteract poisonous snake bites. But if you were bitten , you better know what kind of snake it was. If you got it right, the remedy can save your life, if not, it has nothing to interact with, and can end up killing you.
In Canada’s case, the Feds got it wrong.
For Canada, ZIRP was an antidote we didn’t need for a problem we didn’t have. It ended up creating the very problem it was designed to avoid. I think that’s called ‘irony’.
But…but…Magnum PI told me to do it!
Massive slowdown in GTA pre-construction segment:
“There were 65 per cent fewer houses and condos sold last month compared to April 2017. That put the sales of single-family homes — detached, semi-detached and townhouses — 70 per cent below the 10-year average. Condos were 38 per cent below that average, according to the Building and Land Development Association (BILD).”
https://www.thestar.com/business/real_estate/2018/05/23/new-home-sales-in-gta-hit-20-year-low-in-april.html
Article is not written well but I followed the source and verified the numbers. Similar slowdown is reported in Vancouver.
We are 1 step closer to RE crash.
Wow, I wonder what the bulls are gonna say about that article?
Oh I know, Toronto home prices will never fall, world class city ……… population
……., demand …….
Sales for May should change a few opinions and start a sprint to the exit, even though sellers aren’t panicking! wink, wink …
They’re still saying it. A couple of them on Greater Fool today hammering away on those very points.
I live in Mississauga and right in front of me is a plot where 3 towers are going up. I find it strange that when I went to the sales office a few months ago they told me that tower 1 was almost sold out but still no construction. I figured this weather would be the time to start building but it looks like the current market conditions maybe putting on a hold? I guess I will have to wait and see……
Lots of those projects getting cancelled. I think builders are getting cold feet because many of those “pre-sold” units were sold to people who ultimately will not be able to get financing under the new rules. They see what’s happening to Mattamy right now, and maybe the builders’ own creditors are starting to get a little nervous about that too.
The easiest way to solve the influx of foreign capital, and keep housing affordable and add much needed revenue in places like Ontario and BC is to impose a luxury property tax of 2-4% of the value of the home. I luxury tax would include anything sold over 1mil. So in essence if you play you have to pay. At 2% all the home sold for over a 1mil would have to pay 20k per year in taxes.
That would solve the problem very quickly.
Check out the newspaper articles from 1988 /89 on Real estate in Toronto.
Exactly the same arguments as to why RE prices in GTA (Toronto then) could never meaningfully recede – world class city (they actually said this crap back then too ), limited land, government would never let it happen, rates will not go any higher, etc. etc.
Difference is today, debts are much larger and interest rates much lower.
If, and that is a big if, the GTA market crumbles, I think it is reasonable to expect prices to be cut in half (50% drop) from the peak.
The knock on effect of RE will badly impair economic activity further, thereby reinforcing the downward trend.