Just hearing those words creates a visceral response among some who see it as a sinister product that drains fragile old people of their home equity.
Reverse mortgage let seniors pull cash out of their homes with almost no qualifications - up to 50 per cent of their property value. The downsides include rates that are up to 2.5 percentage points higher than standard mortgages, fees and penalties for early repayment and smaller inheritances for the borrower's heirs.
Whether reverse mortgages are good or bad depends on whom you ask. But either way, one thing seems clear: reverse mortgages are here to stay, and they're becoming a go-to solution for a growing number of older Canadians.
In fact, the catalysts for growth are so evident that I'll go out on a little limb and make a prediction. Within a decade, one in ten senior homeowners will sign up for a reverse mortgage, and yes, many will take them to the grave.
Here are ten reasons why:
1. Falling returns – Actuaries project that stocks, a staple in most retirement portfolios, could return roughly 1.45 per cent less than they have in the past, on an inflation-adjusted annual basis. And long-term bonds won't return any better, especially if rising rates drag down bond prices and seniors have to liquidate their portfolios to fund retirement. With lower returns come smaller retirement nest eggs.
2. Sporadic saving – Returns aside, people simply aren't saving consistently. Less than four in ten saved for retirement in 2014. Half of Canadians think they'll run out of money within ten years of retiring and/or outlive their savings. A stunning 47 per cent of 55– to 64-year-olds say they don't have a penny saved for retirement.
3. Rates have fallen – You can now get a reverse mortgage for as low as prime + 1.25 per cent for a variable rate or 4.99 per cent for a five-year fixed. These rates could drop further if funding costs fall and/or HomEquity Bank – the leading provider – ever gets nationwide competition.
4. Industry acceptance – Mortgage brokers and financial advisers will increasingly push reverse mortgages for two reasons. For one, they may be paid more as HomEquity ramps up its adviser compensation program. And two, reverse mortgages are no longer a last-resort solution in some cases. Drawing on home equity instead of liquidating retirement investments can help certain seniors save taxes, preserve old-age benefits, maximize CPP benefits, and diversify and extend the life of their investment portfolio.
5. Under-employment – Job quality is deteriorating which could make retirement savings' shortfalls more common. It's no surprise that more people expect to work past retirement age. And it doesn't help that senior unemployment has almost doubled since the mid-1980s.
6. Lots of equity – More homeowners than ever (24 per cent) are relying on their home(s) as their main source of retirement income. Fortunately for seniors, home values have surged 430 per cent in the last 30 years, knock on wood.
7. More homeowners – Canada's home-ownership rate has leapt from 61 per cent in 1984 to over 70 per cent today. In turn, more people are qualifying for a reverse mortgage.
8. Longer lifespans – In 15 years, seniors will make up 23 per cent of the population, versus 15.6 per cent today. Not only that, but we're living longer (to age 81.7 on average, and counting). Unfortunately, costly health problems become more frequent around age 77, on average, a problem since retirement savings aren't keeping up. Moreover, 91 per cent of Canadian boomers want to stay in their own home as long as possible. But home care isn't cheap and it's getting costlier every year.
Total and share of population 65 and over by decade, 1971–2080
Source: Statistics Canada (1971-2010) and Office of the Superintendent of Financial Institutions (2020-2080)
9. Bigger mortgages – Mortgage and credit line debt surged 62 per cent and 132 per cent, respectively from 1999 to 2012. If you haven't experienced it, mortgage payments on a fixed income can be, shall we say, stressful.
10. Financial hot water – More older Canadians are having to bail out their sinking financial ship. As just one example, 21 per cent of Credit Counselling Society clients are now age 55 or older. That compares to just 5 per cent 19 years ago. As of 2010, seniors were 17 times more prone to insolvency than they were just two decades ago.
Assuming that most of these trends won't reverse anytime soon, reverse mortgages will become a vital fallback for hundreds of thousands of Canadians in decades to come. And after 29 years in existence, they may even become a mainstream financial-planning tool.
Canada's only national provider, HomEquity, sold 23 per cent more reverse mortgages in 2014, and that growth is just a hint of what's around the corner. In the U.S., reverse mortgage sales have been up to 100 times greater than in Canada (mind you, interest deductibility and reverse mortgage insurance play a role down south).
There are usually better alternatives than reverse mortgages, like proper planning, downsizing, landing a renter, getting a home equity line of credit and so on. But needs cannot always be planned. A Monitor Deloitte survey last year found 845,000 - or 17.6 per cent - of Canada's 4.8 million homeowners age 55 plus had a serious financial need and were looking for options. The above options won't work for many of those folks.
That's why one in ten senior homeowners may rely on a reverse mortgage within a decade.
Quick Reverse-Mortgage Facts
- Who can get one: Almost any homeowner age 55+, with no credit or income check
- How much can you get: 20 to 50 per cent of your property value, tax-free with no payments required
- What determines how much you get: Your age, type of home, location and existing secured debt
- When is it paid back: When both spouses die or sell the home, or sooner if one prefers (a penalty and fees may apply if you pay off a reverse mortgage in the first ten years)