Many retirees use reverse mortgages to pay off existing debts, while others opt to provide an early inheritance.DARRYL DYCK/The Canadian Press
Reverse mortgages are one of Canada’s most debated financial products. They allow homeowners aged 55 and older to borrow against their home equity, with no payments required until they sell, move out or pass away, while interest accrues on the loan balance.
Their use has grown sharply, with total reverse mortgage balances reaching $10.9-billion, up at an average annual rate of 20.9 per cent over the past decade. Once interest accrual and repayments are accounted for, new originations alone have grown more than 16 per cent annually.
A key benefit is that reverse mortgages allow seniors to access funds without selling or downsizing. Borrowers keep ownership of their home, while the lender registers a mortgage against the home’s title.
Most products cap borrowing at 55 per cent of a home’s value. In practice, most borrowers qualify for far less than 50 per cent, according to Rebecca Awram, a reverse mortgage specialist at Indi Mortgage in Vancouver.
So why does the product attract so much criticism? Some of it stems from misconceptions, but other complaints are real concerns.
A common misconception is that the lender takes ownership of the home. In reality, borrowers retain title as long as they live in the property and meet the loan terms, and will never owe more than the net proceeds from the sale of their home.
Much of the stigma traces back to aggressive sales practices in the United States during the 1990s and 2000s, which created a bad reputation for the product that has extended well beyond those markets.
One legitimate concern is their relatively high interest rates. The lowest five-year fixed reverse mortgage rate is currently 6.44 per cent, compared with 3.99 per cent for the best five-year fixed mortgage rate.
The premium reflects the lender’s risk: repayment can be deferred for years, and reverse mortgage issuers lack access to the cheap funding channels available for conventional mortgages.
Some critics point out that reverse mortgages erode the inheritance left to children. While the loan balance does grow over time, many borrowers retain substantial equity thanks to long-term home price appreciation.
Many retirees use reverse mortgages to pay off existing debts, meaning one debt simply replaces another. Others opt to provide an early inheritance, supporting their children while they are still alive.
A common complaint about reverse mortgages has been the lack of options. In smaller provinces and rural areas, HomeEquity Bank has been the only major provider, as Equitable Bank’s coverage is limited to select urban areas of British Columbia, Alberta, Ontario and Quebec.
There are two newer entrants, Bloom Financial and Home Trust, although their combined market share is estimated at less than 2.5 per cent, compared with HomeEquity Bank’s roughly 75 per cent and Equitable Bank’s 23 per cent.
Reverse mortgages are relatively complex products. Yet the market continues to expand, driven by an aging population and the growing number of retirees who view their home as their primary source of retirement income.
Hanif Bayat, PhD, is the CEO and founder of WOWA.ca, a Canadian personal finance platform.
