There's still one notable example of the old Canadian conservatism with money.
It's the reluctance of retired people to crack open the equity they have in their homes and spend the money. Strong growth in demand for reverse mortgages suggests this won't last.
Our less cautious attitude to money can be seen in ever-rising household debt. We're also buying houses at prices that are way out of sync with our incomes, and swapping out bonds and GICs in our investment portfolios for riskier but higher-yielding dividend stocks. Somehow, using the equity in your home for your retirement is resisting this erosion of the old ways with money.
It's not as though home equity is sacred. Borrowing via home equity lines of credit (secured by your home equity) is so common these days that the federal Financial Consumer Agency of Canada recently issued a warning how they're contributing to rising household debt levels. Where people have been cautious in the past is in unlocking home equity later in life through reverse mortgages.
The value of new business generated at reverse mortgage provider HomEquity Bank last year was $459-million, a fairly modest amount that helps explain why no one is challenging HomEquity in this sector. But the company's smallish base of business is generating big growth. Reverse mortgage sales rose 26 per cent in 2016, and jumped 35 per cent in the first five months of this year compared with the same period a year ago.
Three trends suggest more use of reverse mortgages – strong price increases over the past decade in many housing markets, rising debt levels and an unwillingness to compromise our lifestyles to save more.
With more people retiring with debts, HomEquity finds that 30 per cent to 35 per cent of its business is accounted for by people paying off mortgages, lines of credit and credit cards. "They've retired and they've still got debt that's costing them cash flow," HomEquity CEO Steven Ranson said in a recent interview. "It's like, oh my gosh, I can't really afford this debt."
Mr. Ranson said that 20 per cent of HomEquity's business comes from people with homes valued at $3-million or more. "They're not really keen to lower their lifestyle expectations, and they burn through the money they have pretty quickly."
Soaring home equity helps sell the reverse mortgage as a solution for people 55 and older who need money. In fact, there's a trendy new term for exploiting the value in your home – "equity release."
The conservative way to release equity from your home is to sell it, downsize to something less expensive and pocket the difference. But Mr. Ranson said a lot of seniors want to stay in their homes. This leaves them two options – the home equity line of credit, or HELOC, and the reverse mortgage.
A HELOC is probably the easiest way to dip into the equity in your home, but you have to keep up with the interest payments. With a reverse mortgage, you can borrow up to 55 per cent of your equity. Interest is charged on your reverse mortgage balance at rates that are a little over double those for a regular mortgage, and no monthly payments are required. The debt (principal and accumulated interest payments) is repaid when you sell your house or die.
The danger with a reverse mortgage is that equity is used for short-term purposes and thus not available in the future to downsize or cover long-term health-care costs. On the other hand, home equity is the No. 1 financial asset in many households. Tapping into this equity can make sense in some cases.
For this reason, it's time to take a fresh look at the reverse mortgage and get over the common view that it's a last resort or short-sighted measure. But you have to get the details right if you use a reverse mortgage. Don't dip into your home equity just because it's there. You might need it later to buy a condo or smaller home, to move into a retirement home, or to pay for long-term care.
If a reverse mortgage seems to make sense, get a second opinion from an accredited financial planner. The equity in your home is a terrible thing to waste.