Parents should think carefully before funding their kids’ home purchases, say debt and financial experts who are seeing retirees pay the price for that well-intended, but sometimes misguided, decision.
There’s been a sharp increase in the number of people over the age of 65 who are insolvent and unable to pay their debts, says Lana Gilbertson, Vancouver-based licensed insolvency trustee and senior vice-president at MNP Ltd. By the time they get to Ms. Gilbertson’s office, they usually no longer own a home, if they ever did, and their debts are out of control. Ms. Gilbertson helps people consolidate debts and go through bankruptcy and she also provides free advice on the options available before someone ever gets to that point. She’s been working as a federally regulated trustee for 20 years. She saw an increase in insolvency for the 65-plus cohort starting around the downturn of 2009 – and she’s seeing another rise, mostly among seniors who are widowed or divorced, and have no one to share the financial burden.
“We are definitely seeing a spike in filing and I do expect this to continue,” she says. “I still see it increasing, especially in Vancouver, in the over-65 group.”
The reasons seniors are part of this growing trend, she says, is they have not saved enough for housing costs in retirement, they have unexpected medical costs and they are helping their kids buy homes. Ms. Gilbertson is often telling her retirement-age clients that they should apply for BC Housing’s subsidy, even though that agency is overwhelmed with requests. Seniors' housing is desperately needed.
“The cost of living in Vancouver is astronomical and what I’ve seen in the last few years is very concerning because people are coming to me, and I can help them with the debt, but I can’t solve the problem of income and living expenses,” she says. “I see retirees spending upwards of 80 to 85 per cent of their income on housing, in some cases. The other thing is, there are definitely a lot of retirees, or people in this age group over 65, who are helping their children or outright supporting them. I think that for many of them that I deal with, they feel a real sense of duty.”
New findings show that one-quarter of homeowner boomers over the age of 65 are living with mortgages in the B.C. Lower Mainland, according to 2016 census data analyzed by Andy Yan, director of Simon Fraser University’s City Program. In the Vancouver region, that’s an 18-per-cent increase since 2006, Mr. Yan says. But Vancouver’s boomers aren’t unique. The high number of retirees still living with a mortgage is a national concern, with an even greater spike in Canada’s largest city. In the Toronto region, there’s been a 30-per-cent increase in mortgages for the 65-plus cohort for the same period, according to Mr. Yan.
“For many in Canada, the road to old age seems to be a precarious journey weighted down by lifelong debt,” he says.
Escalating property prices in Vancouver and Toronto have enabled the boomer generation to leverage home equity for a variety of uses. Realtor Alex Jopson says some of his clients borrow temporarily against their homes to finance a down payment on a presale condo. Once they take possession a few years later, they sell off the family home and pay off the debt. Many parents either loan or fund their kids’ down payments so they, too, can get into the market. If they are in their 60s or 70s, and funds are getting tight, they might take out a reverse mortgage, a product that has become increasingly popular. Whatever the reason, seniors are leveraging their equity like never before. For some, the concern is the degree that they are taking on debt.
“Ten years ago, helping adult children get into the real estate market might have meant a $10,000 loan, whereas nowadays it’s 10 times that, at least,” Ms. Gilbertson says. “I think it’s important that parents assess what they can afford to give. And how they go about it. If that’s difficult to do, perhaps they can talk to a professional.”
Reverse mortgages used to be taboo – and many financial advisers continue to advise clients against them – but have become increasingly popular since they were introduced in the 1980s. They are designed for older people who want to borrow against their clear-title homes without having to make payments. Toronto-based Equitable Bank launched the Path Home Plan reverse mortgage earlier this year, which allows an older homeowner to borrow up to 40 per cent of the equity in their house. Kim Kukulowicz, senior vice-president, residential sales and partner relations, says her clients are, on average, 74 years old. She says reverse mortgages aren’t for everyone, because the interest rate is around 6 per cent to 7 per cent. But if a senior homeowner wants to stay in their home, has a lot of equity and needs extra cash flow, it’s an option, especially in Vancouver and Toronto markets, where their homes might be a sizable asset. The idea, she says, is to protect a senior’s equity, not to drain it.
“I launched this product in January. It’s top of mind with seniors being the fastest-growing segment, and having options out there,” Ms. Kukulowicz says. “Not everybody has a house paid free and clear and all these investments sitting in the bank to fund their retirement. The majority isn’t so lucky. And people want to feel like they have options, that they are in control.”
Ms. Kukulowicz says the new lending “stress test” rules are making reverse mortgages more popular. Parents are giving their kids their inheritances early in order to buy homes, often because the new lending rules make it harder for their kids to buy into the market.
Also, she’s seeing the 55-plus group purchase bigger houses and take on more debt. As a result, she has seen an increase in older homeowners applying for reverse mortgages to pay down their first mortgages, now that they no longer qualify according to the stringent rules.
“What’s happening is, let’s say it’s at renewal time – or they’re going and purchasing a house – because they need a mortgage, they are not qualifying under the rule changes. With the stress test, they don’t qualify, so we are seeing a lot of that business.
“It shows you how the market has changed the dynamics, because this product is really intended for seniors with a lot of equity in their homes. They may have some small debt, but not really big debt.
“But as a result of B-20 [guidelines], clients are coming to us and they need to pay out their first mortgage – that’s a big one. They are retiring, and they may have some income, or some don’t. And they have a first mortgage sitting there.”
Her company’s target market is the senior who owns their house clear-title and might have a bit of credit-card debt. But she’s seeing retirees who are risking a greater debt load. Some are even combining a reverse mortgage with a high-interest-rate private-lender mortgage because of the new stress-test rules, she says.
“I don’t think we’ve always thought about seniors, and how much debt they have … it is kind of surprising.”
North Vancouver, B.C.-based Steve Bridge is a fee-only certified financial planner, who doesn’t work on commission. He is not a fan of the reverse mortgage, because of the cost. When his retirement-age clients ask about giving their kids money, he says they usually change their minds after they get together to crunch the numbers.
“After we’ve done the work and they see the real numbers, that goal goes down quite a bit or it goes to the side, because they see where they are with their own retirement goals.
“Take care of yourself first, and then later, if you can, your children. One of the best gifts that parents can give their adult children is to be financially independent,” he says.
If an adult child can’t afford the down payment, he wonders what’s next.
“What happens when there’s a special assessment on the condo, what if the roof goes, or the plumbing, or it needs a renovation? My thinking is, if somebody can’t afford a down payment, they can’t afford a house – I promise you, if you told a real estate agent that, they would not agree with me,” he adds, laughing.
Mr. Bridge thinks another problem might be people overspending on homes instead of downsizing. They get attached to the idea of being in a big house they don’t need any more. And people have made peace with the idea that they will die with debt.
“What is happening is people are buying more house than they can afford, barely scraping by, and not having any retirement savings.
“I think that carrying debt is now seen as more acceptable. I’ve seen some people who don’t mind at all. They think it’s totally fine. Some people are A-okay with it.”
He advises anyone who is feeling uneasy about their financial situation to get help from a professional adviser sooner rather than later.
Part of the reason debt can get out of control is because of a feeling of shame, especially with a group that has spent a lifetime working, Ms. Gilbertson says.
“And they don’t have the years to recover that a younger person does," she says. "It’s hard to put it all back together when you are in the twilight years.
Ms. Gilbertson knows of a 73-year-old who is still doing drywall work part time, because he has to supplement his Canada Pension Plan. Others who need part-time work do babysitting or some retail.
She sees a reverse mortgage as great if it’s someone who’s entering into it with rock solid financial advice.
“Gone are the days when you would pay your mortgage off, celebrate that and stay mortgage-free for the rest of your life. Now, it seems we’ve become very comfortable with using our homes either to fund lifestyle choices or to pay for retirement, and I think it does have its dangers, because people do need a place to live when they get older, and if you are using your home as a retirement plan, if that’s your sole source of retirement funding – I think that is a red flag.
“I think there is a problem brewing, for sure,” she says. “When you consider the cost of regular housing, the lack of retirement housing, and the growing population of boomers and the debts that people are carrying, I look ahead to the next five to 10 years, and I am a little concerned.”