Another step was taken this week in the march of reverse mortgages toward the mainstream of Canadian financial life.
Ontario Teachers’ Pension Plan has bought HomeEquity Bank, by far the largest provider of reverse mortgages in this country. For the reverse mortgage business, this is a big deal.
Pension plans own assets chosen to help them meet their obligations to pay income for life to retired plan members. Teachers obviously sees the reverse mortgage business providing the stability and growth it needs. Essentially, it’s betting that reverse mortgages will get more popular.
No doubt, they will. Aging demographics, a shift in attitudes toward long-term care and ballooning home equity in a hot housing market are all factors that support the inclusion of reverse mortgages as a retirement planning option.
So does the view among some homeowners that their house is their retirement plan. That’s a plea I often hear when any proposal to tax profits on the sale of houses is discussed.
A reverse mortgage is a way for people 55 and up to tap into their home equity and not repay what they owe until the property is sold. Reverse mortgages have been around in Canada since 1986 and are now worth more than $5-billion in total.
To be blunt, that’s small scale. You want a financial product with heft? A trio of mutual funds sold in Royal Bank of Canada branches, the RBC select conservative, balanced and growth portfolios, have combined assets of about $106-billion.
Reverse mortgages have their fair share of negatives – interest rates are comparatively high, there are setup fees and penalties for paying them off early and they can burn up substantial equity if you hold them through periods where home prices are flat or falling. But they’re also a problem solver if you live in a paid-off house that has soared in value and need cash to bridge you to a point in the not-too-distant future when you expect to sell and downsize or move into a retirement home.
One sign of faith in the future of reverse mortgages is the emergence of competitors to HomeEquity Bank. Equitable Bank’s reverse mortgage product was introduced in 2018 and a new player, Bloom Finance Co., has quietly entered the business.
Now, an endorsement of reverse mortgages has come from one of the country’s largest pension plans. Steven Ranson, chief executive officer at HomeEquity Bank, said Teachers had been looking at his company for two years and was attracted to the growth potential for reverse mortgages in an aging population that will need options for retirement planning.
“Part of their thesis is that, notwithstanding the tremendous growth we’ve had, Canada is a bit underpenetrated in terms of the over-65 market,” he said.
HomeEquity Bank’s forecast volume of $1-billion in reverse mortgages this year would be a 20 per cent increase over 2020, a slow year because of the pandemic. “When people feel good about the world, we do notice our business does well,” Mr. Ranson said.
Customers of HomeEquity Bank can borrow up to 55 per cent of their home equity through the company’s flagship product, but Mr. Ranson said the average loan is about 30 per cent.
Reverse mortgages are worth a look for seniors who want to remain in their homes but need money to retrofit or upgrade their homes to accommodate their needs. A reverse mortgage could help push off the day where someone has to move into a long-term care home. Seniors without much in retirement savings could dip into the equity they’ve built in the recent housing boom to generate income to live on.
A home equity line of credit is an alternative to reverse mortgages with a lower interest rate, but a requirement to at least make interest payments monthly. HELOCs can be difficult for seniors to set up if they don’t already have one that dates back to their days with a mortgage.
If you saved well for retirement, reverse mortgages will be of zero interest to you. But they’re there for people who need financial options in retirement. A pension plan giant thinks they will get bigger.
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