Federal numbers suggest house-rich, cash-poor baby boomers are exposing themselves to interest-rate danger
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Canada’s debt dependence has been growing more and more apparent, with new data from Statistics Canada showing household levels at 178.5% — a record high — in the fourth quarter of 2018. That’s not to mention home equity lines of credit (HELOCs), a product that is not well understood by Canadians, according to the Financial Consumer Agency of Canada (FCAC).
And a sister product to HELOCs could present another emerging risk. “House rich, cash poor Boomers across Canada are sending reverse mortgage debt soaring,” reported Better Dwelling.
Referring to filings from the Office of the Superintendent of Financial Institutions (OSFI), it said that the balance of reverse mortgage debt dipped slightly in January, but that monthly decline didn’t budge the annual pace of growth by much. “Outstanding reverse mortgage credit is growing at 10x the annual pace of regular mortgage debt,” the news outlet said.
The outstanding balance of reverse mortgage debt was $3.51 billion in January, which translated to a 0.82% decline compared to the previous month. But it still represented a 30.44% increase compared to a year earlier. Over a three-year time frame, the balance of such loans has doubled; over the last five years, it has nearly tripled.
Like HELOCs, reverse mortgages allow homeowners who are at least 55 years old to tap the equity of their residential properties without selling. But one major difference involves the payment terms: those who have reverse mortgages have the option to not make payments, with repayment generally only being required in case of death, sale, or default on the home.
While the option may be worth considering for those who cannot make payments on an ongoing basis, it comes with considerably high interest rates. Better Dwelling noted that borrowing costs for reverse mortgages are much larger compared to HELOCs, so making few or no payments creates a sizeable risk of the remaining home equity being eaten up by interest — a problem for those planning to use their property as an inheritance.
Exacerbating the problem is the fact that interest rates are near all-time lows, which raises the chances of interest-rate increases in the decades to come. That means an even bigger potential bite from compound interest down the line. There are also other associated costs such as legal and administration fees and appraisal expenses, as well as costs of independent legal advice that some lenders require of applicants.
Still, taking on a reverse mortgage is a calculated risk that may be worth taking for some. According to Mark Ting of Foundation Wealth, the money one receives from a reverse mortgage is tax-free, which means it will not reduce their income-tested government benefits like Old Age Security or Guaranteed Income Supplement.
“Some retirees in their late fifties or early sixties take out a small lump-sum reverse mortgage in order to delay enrolling in the Canada Pension Plan (CPP) or Old Age Security (OAS),” Ting wrote in a column for CBC News. “If you delay CPP until age 70, the benefits received would be about 142 per cent of what they would be at age 65. This tactic could make sense if longevity runs in the family.”
