Money Street News


As a growing number of Canadians retire with mortgages, some are turning to reverse mortgages to tackle that debt.

Reverse mortgages are still a niche product, but the business has grown rapidly in the past five years, as seniors who want to remain in their homes struggle amid higher interest rates and soaring living costs.

“We’re seeing a lot more people using [reverse mortgages] for mortgage repayment, but in general just a lot more seniors being interested in reverse mortgages,” said Mahima Poddar, senior vice-president and group head of personal banking at Equitable Bank.

Reverse mortgages have long been seen in a negative light, in part because of the large amount of interest that accrues quietly in the background – at high rates.

Currently, rates at HomeEquity Bank and Equitable Bank – the two heavyweight lenders in the space – hover around 7 per cent for a five-year fixed-rate reverse mortgage, compared with roughly 4 per cent for a traditional mortgage over the same period.

Over time, the debt compounds, eating away at the retiree’s home equity.

Adam Jenkins, a certified financial planner based in Kingston, said it’s something many people don’t consider when they’re sold a reverse mortgage. “Thousands of dollars in interest can build up over the years,” he said.

Reverse mortgages let homeowners, usually 55 and older, borrow roughly 55 per cent of their home equity, depending on the lender. The funds are tax-free and don’t affect eligibility for Old Age Security or Guaranteed Income Supplement benefits. Homeowners can choose to make payments before the maturity date of the reverse mortgage but are not required to. The principal loan and interest must be repaid when the homeowners sell the property, move out or pass away.

There’s one key condition when using a reverse mortgage: The funds must first go toward paying off the balance of the existing mortgage, after which the reverse mortgage lender is registered as first priority – they get repaid first when the home is sold. Any leftover money can be used for other expenses.

The average reverse mortgage loan at Equitable Bank is $350,000, more than enough to cover the average mortgage debt of Canadians 65 and older, which was $131,992 in 2023, according to Statistics Canada.

A mortgage strategy for the Trump years ahead and other 2025 money tips from advisers and planners

HomeEquity Bank’s reverse mortgage business grew almost 20 per cent from 2023 to 2024, while Equitable Bank saw a 47-per-cent increase in its decumulation business, which includes reverse mortgages and insurance lending.

At HomeEquity Bank, roughly half of all reverse mortgage holders in 2024 used the funds to tackle their debts – a 10-per-cent increase since 2021. At Equitable Bank, that figure is even higher, with 70 per cent of clients using reverse mortgages to consolidate debt. Both institutions said a large portion of that is mortgage debt.

But reverse mortgages remain a small piece of the pie. As of Nov. 30, 2024, they accounted for about $9-billion of an overall residential mortgage lending market worth about $2-trillion, according to the Office of the Superintendent of Financial Institutions. Still, that represents about a 20-per-cent increase over the previous year.

Rising inflation, health care costs and stagnant retirement incomes have pushed many older Canadians to deplete their savings and carry mortgages into retirement, Mr. Jenkins said.

Statscan data show that households led by individuals 55 to 64 had $315.7-billion in mortgage liabilities in the first quarter of 2024, up 29 per cent from $244.2-billion in 2020. For those 65 and older, mortgage liabilities grew 45 per cent, from $97.2-billion to $141.2-billion, over the same period.

On top of that, 1.2 million Canadians are set to renew their mortgages this year, and 85 per cent of those loans were secured when interest rates were at historic lows. While it isn’t clear how many seniors face higher renewals, both Equitable Bank and HomeEquity Bank cited higher renewal rates as a key reason why clients are using reverse mortgages.

While they are appealing to people who want to stay in their own homes, Mr. Jenkins cautions that, as the debt mounts, home equity shrinks, reducing what retirees can leave to their heirs or use for future expenses, such as long-term care.

Retirees looking for financial relief should consider extending their mortgage amortization period, Mr. Jenkins suggested. Stretching payments over a longer period can lower monthly costs, though it also increases the total interest paid over time.

Another less common option among his clients is a home equity line of credit (HELOC), which offers lower interest rates than reverse mortgages. While HELOCs require monthly interest payments, borrowers have more flexibility when it comes to repaying the principal.



Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

SUBSCRIBE TO OUR NEWSLETTER

Get our latest downloads and information first. Complete the form below to subscribe to our weekly newsletter.


No, thank you. I do not want.
100% secure your website.