A growing number of baby boomers are tapping into the value of their homes to boost their retirement income, prompting the country’s biggest provider of reverse mortgages to lower the minimum age requirement for the product.
HomEquity Bank, the only national reverse mortgage provider in the country, recently lowered the minimum age requirement for its CHIP Home Income Plan from 60 to 55 due to high demand as a growing number of older Canadians prepare to exit the workforce and look for ways to supplement their pensions.
“We are definitely seeing more growth in the marketplace as more boomers enter or approach retirement,” said Greg Bandler, senior vice president, HomEquity Bank.
“The reality is that Canadians are thankfully living longer but also saving less and spending more,” he said.
With a reverse mortgage, homeowners essentially sell back a portion of their mortgage-free house to the lender for an immediate cash injection.
Homeowners can borrow up to 50% of the value of their property and are allowed to live there interest and principal-free for as long as they need to.
Once the home is sold however, the loan amount in full plus interest must be paid back to the lender.
It may be easier for spendthrift boomers to access cash using their homes, but experts warn reverse mortgages aren’t for everyone.
Millie Gormely is a financial advisor with Investors Group and an Advocis member. Her company doesn’t sell reverse mortgages but she does recommend them to select clients.
“A reverse mortgage is definitely not for everybody,” she said.
“It’s great for someone who has all of their retirement savings sunk into their home.”
Many Canadians, she said, have made paying off their mortgage a priority only to find themselves with no savings once they retire and in need of cash.
About 77% of the average seniors’ net worth is tied up in their home, according to Statistics Canada.
“That doesn’t leave a lot of liquidity to fund what can be some ambitious retirement plans,” Bandler said.
“We do know that most people have not saved enough for their retirement to be able to maintain their standard of living once they are no longer working,” Gormely said.
The numbers back Gormely up. The average 55 to 65-year-old has just $125,000 in their Registered Retirement Savings Plan (to stretch over decades in some cases) and more than half of working adults aren’t contributing to an RRSP whatsoever.
Reverse mortgages however aren’t a magic pill.
They aren’t a great idea for anyone hoping to leave the estate behind for their family since the loan has to be paid back with interest, Gormely said.
Older homeowners with high levels of consumer debt might however want to consider a reverse mortgage.
“It can be a good way to clear up some debt, especially if you’ve got debt going into retirement,” she said.
Roughly 68% of pre-retirees expect to carry debt into their “golden years,” according to BMO estimates.
“You have taken on more debt by doing this but the payback terms on a (reverse) mortgage are generally much more user-friendly than a credit card,” she said.
“It can be used as an emergency kind of thing.”
As of the first quarter ended in March, HomEquity Bank had more than 8,000 reverse mortgages in its portfolio worth $1.1 billion.
Senior's are not all going to cash out at the same time, but over the long term, this is one of a number of big headwinds house prices will face.