Canadian Senior Homeowners Borrowed $5.4 Billion In Reserve Mortgage Debt

Canada’s house rich but cash strapped Boomers are back to tapping their home equity. Regulatory filings with the Office of the Superintendent of Financial Institutions (OSFI) show reverse mortgage debt hit a new record in February. Over the past couple of years, the segment had seen a slowdown. However, growth is now suddenly back, and the balance grew by nearly a fifth in just one year.

Canadian reverse mortgage debt reached a new record, and it’s moving briskly. The outstanding balance was $5.4 billion in February, up 2.0% (+$106.9 million) from a month before. Since last year, the segment has grown 18.3% (+829.9 million), drawing close to a billion dollars. During public health measures, there was a major slowdown, but now that most measures are gone, it appears people are back to borrowing.

Reverse mortgages are exactly what they sound like — a mortgage in reverse. Seniors pledge their home equity in exchange for cash, either a lump sum or a regular payment. They’re like a home equity line of credit (HELOC), but with one big difference — regular payments aren’t required. Payments are generally only due in the event of death, default, or sale.

Since the lender isn’t sure when they’ll be repaid, they charge a premium interest rate. Regular payments aren’t needed but interest still accumulates, chipping away at home equity. Borrowers might want to repay the loan, if possible, despite not needing to do so.

That brings up the benefits and risks of a reverse mortgage. A positive is clearly being able to age in place, use your home equity, and not have to worry about payments. However, since seniors are past their prime earning years, too large of a loan can be tricky to pay back. Others might find when it’s time to sell, they accumulated much more debt than thought. It also becomes more problematic if there’s a downturn and they need to sell for some reason.

Reverse mortgage debt is expected to grow as Canada’s population ages. The sharp acceleration is a bit unusual though, especially considering the timing. Growth goes vertical as home prices and inflation begin to surge.

The increase can mean reverse mortgages helped capitalize the Bank of Mom & Dad. It can also mean seniors needed more funds to cover inflation, or it could just be hot tub time to celebrate a surge in home equity. In any case, these borrowers just committed to some pricey loans. Reverse mortgages are currently 6.99% interest for a 5-year term. If they averaged that rate for ten years without payments, the outstanding balance will have basically doubled.

Sample borrowing:

• Someone 70 years old – has a property worth $1,500,000 – is eligible to borrow up to a maximum of $675,000 – borrows just $300,000 in one lump sum.

• In 15 years (2037) the property value would be $2,336,951 – equity remaining is $1,634.016 (less the $702,925).

• Reverse mortgage of $300,000 borrowed plus interest of $402,925 = $702,925 is what’s payable back.