We can no longer dismiss the reverse mortgage as an icky last resort for the financially desperate home owner.
Introduced in Canada in 1986, reverse mortgages are winding their way into the financial mainstream. Demand for reverse mortgages is soaring, and now there's a new entrant on the scene to challenge the lone incumbent. Equitable Bank's Path Home Plan became available last week in the British Columbia, Alberta and Ontario markets as a competitor to HomEquity Bank's CHIP Reverse Mortgage.
As part of the rebranding of reverse mortgages, expect to hear the phrase "equity release" used a lot more. Path Home Plan uses this term in its marketing to convey the idea of reverse mortgages as a legitimate option for people who want to remain in their homes, yet tap into the equity they've built.
"Traditionally, reverse mortgage products have always been for older people, and for doom and gloom situations where people are desperate," said Kim Kukulowicz, vice-president of residential sales and partner relations at Equitable Bank. "We want people to see it isn't a bad thing to take equity out of your house. It helps Canadians stay in control of their financial security, and they get to live in their home."
Ms. Kukulowicz said her company has been studying reverse mortgages for a few years. There are three reasons for the decision to move forward – the country's aging demographic, soaring home prices that have given residents of some cities huge amounts of equity to work with and questions about whether people are saving enough for retirement.
The sales figures at HomEquity Bank speak loudly, too. The lender sold $608-million in reverse mortgages in 2017, up 32.5 per cent over the previous year. The 2017 increase over 2016 was 26 per cent. HomEquity Bank explains this surge as being the result of increasing customer familiarity with the CHIP reverse mortgage and a rising need to use home equity to help fund retirement.
Path Home Plan lets you borrow a maximum 40 per cent of your home equity, while CHIP maxes out at 55 per cent (both are available to people 55 and older). Interest applies on your debt at rates well above conventional mortgages. For example, both Path Home Plan and CHIP charge 5.99 per cent on a five-year fixed-rate mortgage, compared with as low as 3 per cent or so for regular mortgages of the same term. The biggest appeal of the reverse mortgage is that you don't have to repay principal or interest until you sell. This is a big advantage over another tool that aging home owners can use to tap the value in their houses – a home equity line of credit, or HELOC, which typically requires you at least to make monthly interest payments.
A reason for caution with reverse mortgages is that they allow people to use home equity they may need later for health-care costs such as a long-term care home or home care. The success of reverse mortgages going forward will depend to a large extent on whether mortgage brokers can be relied upon to provide effective, objective advice on the suitability of these products.
With home values riding a wave in many cities, it's easy to imagine that taking some equity out of a home won't hurt a bit. But home prices could fall at some point – will mortgage brokers help clients map out what this would mean when it comes time to sell? Will they help clients figure out whether the remaining equity in their home will cover their needs?
Brokers with experience selling reverse mortgages may be able to provide useful guidance, but let's remember that their compensation comes from selling the product and not providing advice. More stringent qualifications for brokers selling reverse mortgages makes a lot of sense. For now, people considering this borrowing option should first buy a consultation with a fee-only financial planner.
Too often, Canadians resort to debt to deal with their financial challenges. An accredited financial planner can help you understand the reasons you need a reverse mortgage in the first place.
Rob Carrick