Reverse mortgages are proving to be extremely popular with elderly Canadians.
New data shows that the popularity of so-called "don’t-pay-until-you-die" reverse mortgages are rising in popularity in Canada as more older people take on debt. Homeowners age 55 or older can borrow as much as 55% of the value of their home. Principal and compound interest don’t have to be paid back until the home is sold or the homeowner dies. To keep the loan in good standing, homeowners only need to pay property tax and insurance, and maintain the home in good repair – things they would have to do even if the home was paid off and mortgage free.
According to the Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, outstanding balances on reverse mortgages have more than doubled in less than four years to $3.12 billion, excluding foreign currency amounts. Although they represent less than one percentage point of the $1.2 trillion of residential mortgages issued by chartered banks in Canada, reverse mortgages are growing at a much faster pace.
Reverse mortgages rose 22% in June from the same month a year earlier, versus a 4.8% increase for the total market. The increase shows how some seniors are becoming part of Canada’s new debt reality. After a decades-long housing boom, the nation has the highest household debt load among the Group of Seven leading industrialized nations, a key reason why the Bank of Canada has resisted cutting interest rates.
Canada’s big five banks have so far shied away from offering reverse mortgages. Only two lenders currently sell the product in Canada. HomeEquity Bank, whose reverse mortgage has been on the market for 30 years, dominates the space with $3.11 billion on its books. Equitable Bank, a relatively new player, has $10.1 million. Shares in parent Equitable Group (TSX:EQB) have surged 75% to a record this year.
Interest rates are typically higher on reverse mortgages than those for conventional mortgages. For example, HomeEquity Bank and Equitable Bank charge 5.74% for a five-year fixed mortgage. Conventional five-year fixed mortgages are currently being offered online for as low as 2.4%.
While delinquency rates on regular mortgages are still low for seniors, they were the highest among all age groups in the first quarter, at 0.36%, according to data from the federal housing agency. The 65-plus demographic took over as the most delinquent group at the end of 2015. For non-mortgage debt, delinquency rates in the 65-plus category have seen the biggest increases over the past several quarters, according to data from Equifax.
