Reverse mortgages are booming despite Canada’s turbulent rate phase

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High rates haven’t stopped Canadians from tapping their home equity by way of reverse mortgages.

HomeEquity Bank, the country’s largest reverse mortgage provider through its CHIP product, says demand was up 30% in 2022 compared to the previous year. It saw total reverse mortgage originations top $1 billion for the second year in a row, adding that a “key strength” of its strategy has been its broker distribution network.

Reverse mortgages allow senior homeowners 55 and older to extract the equity they’ve built up in their home, either by way of tax-free lump-sum or monthly payments.

HomeEquity Bank says Canadians are looking at their homes as a way to pay for retirement without the need to sell.

“Canadians have traditionally focused on the dollar value of their home, but now I believe people are starting to see the value their home provides as they look to manage their finances in retirement,” Steven Ranson, President and CEO of HomeEquity Bank, said in a statement.

Equitable Bank, the country’s other mainstream provider of reverse mortgages through its Flex product suite, is also seeing a surge in demand, confirms Jackie Uy Ham Lee, Vice President of Growth Businesses and Personal Banking Lending.

“Our best estimate is 25% to 30% growth in the market year-over-year,” she told CMT. “There is really substantial interest in the product, and uptake of the product, and we hope that will continue.”

Unlike a traditional mortgage, a reverse mortgage allows senior homeowners to borrow money against the value of their home. They are structured so that seniors can never owe more than their home is worth, and the debt is typically repaid once the house is sold or the homeowner passes away.

This type of mortgage isn’t an option for anyone who doesn’t already have significant equity already since they’re typically limited to a maximum of 55% of the home’s value. But for homeowners who do, a reverse mortgage can bridge the gap between fixed income benefits like the Canada Pension Plan or Old Age Security and the rising cost of living.

“That gap is meaningful,” Uy Ham Lee says. “They’re going to have to figure out how to close that gap, which may include downsizing their home, looking for alternative financial solutions, or changing their lifestyle. So, the reverse mortgage product is a great one for seniors, and we think that is part of what’s driving its popularity.”

Lingering concerns about reverse mortgages

Reverse mortgages aren’t necessarily for everyone, especially with average reverse mortgage interest rates averaging between 7% and 9% currently. In the absence of home price appreciation, that can quickly deplete a portion of equity in the property.

Uy Ham Lee says some still remain wary of reverse mortgages, but adds that Canadian reverse mortgage borrowers enjoy many more protections compared to south of the border.

One of those protections is the negative equity guarantee, a rule that means a borrower will never owe more than the value of their home when it was assessed. This is standard for Canadian reverse mortgages. Another difference, Uy Ham Lee says, is that Canadian loan-to-value ratios tend to be lower than American ones, which better preserves equity.

“I think that the Canadian product is unique and has these customer protections built in,” Uy Ham Lee says. “When potential borrowers learn more about the nuances of the Canadian product, they start to understand that it is different than in the U.S. and is a really viable solution that they should know more about.”

It is also worth noting that interest rates on reverse mortgages are higher than traditional mortgages by about 1.5 to 2 percentage points. However, payments are never required until the homeowner moves or passes away. The borrower simply has to keep paying their property taxes and maintain the property.

“A lot of room for growth”

While reverse mortgages aren’t for everyone, they can be a crucial financial solution for many seniors who are increasingly turning to them.

Ben McCabe, founder and CEO of Bloom Financial, a Toronto-based reverse mortgage provider that launched in 2021, says these products are less rate-sensitive than their traditional counterparts.

They also cater specifically to seniors, the fastest-growing population demographic in Canada at the moment, and one that is placing a high degree of importance on the ability to age in place.

According to a study conducted last year by HomeEquity Bank, 9 in 10 Canadians said they want to be able to live out their retirement years in the comfort of their home.

“I think there’s a lot of room for growth,” McCabe says of the reverse mortgage market, “as more and more Canadians realize this is a potential solution for them.”