An upstart player in reverse mortgages has a novel idea for broadening its business – give people credit card-style convenience in tapping their home equity.
The Bloom Home Equity Prepaid Mastercard from Bloom Finance Co. is designed for people who want to occasionally supplement their household income. Pay for something with the card and the amount is added to your reverse mortgage.
Bloom’s core clients are typically those looking for big lump sums to pay off a mortgage carried over into retirement. Retiring with a mortgage and other debts is getting more common with living costs on the rise, and meeting that challenge can be a tough one for many retired homeowners.
Bloom Financial has been around since 2021 and is coming up on 1,000 clients with an average age of 71, chief executive and founder Ben McCabe said in a recent interview.
“They probably retired somewhere between three and five years ago,” Mr. McCabe said. “And for probably around 80 per cent of them, the primary use of proceeds is to get rid of a mortgage payment. They were able to service that mortgage before they retired, but now they’re living on a fixed retirement income and that monthly payment is untenable.”
Canada Mortgage and Housing Corp. numbers show that seniors accounted for 14 per cent of mortgage-holders in the third quarter of 2023. That’s up from 13 per cent in the first three months of the year and 10 per cent in 2017.
An ideal timeline is getting your mortgage paid off by your mid-50s and then rerouting your monthly or biweekly payments into retirement saving. Between expensive homes, high mortgage rates and everyday inflation, it’s getting harder to pull this off.
Other debts besides a mortgage often get carried into retirement as well. HomeEquity Bank and EQ Bank both report that a portion of their reverse mortgage business is people consolidating various types of debt. Another significant customer segment is people who are rich in home equity, but lack cash flow.
Life in retirement is ideally more affordable than in your working years because you’re (a) not saving for retirement any longer and (b) you have reduced or eliminated debt. If you have to make a mortgage payment in retirement, it means a bigger drain on your income and savings.
Mr. McCabe said using a reverse mortgage to pay off a traditional mortgage is like “repatriating cash back into your pocket.”
The cost of this convenience is substantial. While there are no monthly payments on a reverse mortgage, an interest bill quietly accumulates in the background and must be paid along with the principal when you sell.
A hefty interest rate is charged for using a reverse mortgage. Bloom had a promotional three-year fixed rate of 7.58 per cent in late March that compared with 4.99 per cent for a well-discounted traditional three-year fixed mortgage.
Reverse mortgages are a valid tool for converting equity into cash while remaining in your home – the benefits are non-taxable and won’t trigger clawbacks of Old Age Security payments or the Guaranteed Income Supplement. But reverse mortgages work best in short-term situations where the interest cost is contained.
Someone in their early 70s could conceivably have a reverse mortgage ticking in the background for 15 to 20 years or more. Paying off a reverse mortgage before you sell is possible, but there are fees to do so.
Mr. McCabe said Bloom customers have an average credit score of around 755, which is excellent and indicates a degree of financial responsibility. But with a mortgage and inflation to contend with, they need help affording their monthly costs.
The Bloom Home Equity Prepaid Mastercard offers a different way to squeeze cash out of a house than a lump sum. Users can set up a sustainable monthly amount to access on the card, with the spending added to their reverse mortgage balance and paid off when the home is sold.
Reverse mortgages issued by Bloom, EQ Bank and HomeEquity Bank – the category heavyweight – amounted to about $7.7-billion as of Jan. 1, according to the federal Office of the Superintendent of Financial Institutions. While that’s a small number in the mortgage lending universe, it represents an increase of 18.5 per cent over the previous 12 months. Helping retirees restructure their debt loads is a growth business.
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Rob Carrick