Seniors cash-crunch solution?

Opinion

If you’re unfamiliar with a reverse mortgage, you probably don’t watch Canadian network television.

Indeed, younger generations — who prefer consuming content on their handheld devices — are likely unacquainted.

No matter, reverse mortgages aren’t for them.

They’re for greying Canadians with substantial equity in their homes, allowing them to borrow with no repayment until the home is sold. And a growing number of homeowners age 55 and up are using them.

HomeEquity Bank — owned by the Ontario Teachers’ Pension Plan Board — is the largest purveyor of reverse mortgages in Canada.

It has more than $5 billion in mortgages through its CHIP (Canadian Home Income Plan), which accounts for roughly 40 per cent of its business, says Niary Toodakian, vice-president of brand and public relations at HomeEquity Bank.

“Age 72 is kind of the sweet spot of our business, but our solution is expanding.”

Given aging Canadians’ principal residences — the properties typically eligible for reverse mortgages — have gained significantly in value in recent years, it’s likely HomeEquity Bank’s product resonates.

Yet are reverse mortgages right for every senior?

Certainly not, says a financial planner based in Toronto, a housing market where average single-family detached home prices have gained more than 200 per cent in the last 20 years to reach about $1.2 million.

“A lot of really good candidates are people wanting a few more years in their home,” says Jason Heath, an advice-only certified financial planner with Objective Financial Partners Inc.

They borrow an amount of equity significantly less than the maximum of 55 per cent of a home’s value and pay it back when they sell and move about five years later, he adds.

Of course, home prices have grown in Winnipeg, also increasing more than 200 per cent in the last 20 years — though the average price is only about $400,000.

Still, Toodakian notes Manitobans increasingly are using HomeEquity’s reverse mortgage products.

Across Canada, its business has seen 20 per cent year-over-year growth in the last two years, in part reflecting aging homeowners’ battle with rising costs of living, she adds.

The greatest appeal is for individuals in their mid-70s that have largely run out of savings, with only Canada Pension Plan and Old Age Security to cover expenses, and they have significant equity in their home.

“Traditional banks are typically hesitant to loan to them unless they have significant investments or employment income,” Heath says.

Even compared with other credit products — like home equity lines of credit — reverse mortgages can be more appealing.

Most credit lines require monthly payments on interest, which ultimately eats into a senior’s monthly cash flow, Toodakian says.

In contrast, reverse mortgages provide individuals with a lump sum, monthly or quarterly payments that involve no taxes — because these are loans — and no repayment while they live in the home.

“For someone who doesn’t have other income (aside from CPP and OAS), this is probably the only program (loan) that they qualify for,” says Leah Zlatkin, Toronto-based mortgage broker and expert with LowestRates.ca.

Although reverse mortgages can be a viable solution for aging homeowners, the product faces “negative connotations” that it results in seniors losing their homes, which is not true, she adds.

Much of the negativity surrounding reverse mortgages stems from the U.S., where “loosey goosy” lending practices in the run-up to the subprime housing crisis in late 2008 did lead to American seniors losing their homes, Toodakian explains.

But Canada has long had tighter regulations, and lenders like HomeEquity are “conservative” only providing loans up to 55 per cent of a home’s value, she adds.

Rarely do borrowers qualify for loans to the maximum amount. At HomeEquity, the typical loan is less than 40 per cent of a home’s value, she says.

Still, would-be borrowers should understand well compound interest’s impact over long periods of time, especially given reverse mortgages charge higher rates than conventional mortgages. Toodakian notes the elevated rates address the risk for lenders who forgo regular repayments over several years for being paid back in full upon a home’s sale.

As of August 2024, HomeEquity’s CHIP interest rate was 6.69 per cent.

Potentially, the interest cost, then, for a $100,000-loan would be more than $172,000 after 15 years. Or $272,000 owing against the home upon sale.

Given compounding interest’s potential negative effect on long-term net wealth, Heath typically does not recommend reverse mortgages for younger retirees facing a cash crunch. Instead, he suggests working part-time, cutting costs or downsizing.

It’s not, however, just cash-poor, house-rich retirees using reverse mortgages. Some more savvy seniors use them for investment, Zlatkin says.

One example she has seen involves individuals borrowing against their home to purchase a condominium. “Then, they rent it out while still living in their home, using the rent to provide cash flow and, eventually, they move to the condo and then rent out the home.”

For most seniors, however, that’s far too complex for their tastes. Rather, reverse mortgages’ appeal is providing cash near-term while allowing them stay in their home a few more years. Then, upon sales, they generally still have plenty of equity left to fund future retirement needs, including shelter, Heath says.

Still, many HomeEquity CHIP users borrow lump sums for one-time events like a major renovation or helping adult children buy a home, Toodakian notes.

“A lot are also using our products to pay off other loans to free up cash flow,” she adds, noting the driver in this case is reverse mortgages do not require repayment until the home is sold.

Regardless of the purpose, seniors must understand reverse mortgages’ long-term interest costs and how those may affect their overall wealth.

For some, those costs are a worthy trade-off, but others may decide reverse mortgages aren’t for them. But if you’re retired, house rich and cash poor, reverse mortgages may merit closer examination.

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com