Canada’s largest reverse mortgage lender posted record originations last year
Canada’s largest reverse mortgage lender posted record originations last year, with factors such as disappearing workplace pensions and stringent stress tests for borrowing pushing seniors to tap home equity in order to pay debts and fund their retirement.
“Seniors now are taking more debt into retirement and debt is pretty hard to manage on a fixed income,” said Steven Ranson, chief executive of HomeEquity Bank, which originated a record $820 million in reverse mortgages in 2019, up from $767 million a year earlier and $309 million five years ago.
A reverse mortgage typically carries a higher rate of annual interest than a traditional mortgage — the current five-year fixed rate at HomeEquity is 5.59 per cent — but no payments are made until the homeowner sells the house or dies and the loan is repaid by their estate.
The qualifying age for such an arrangement is 55, but Ranson said the bank’s average client would be in their early seventies. He added between 30 and 40 per cent of the business comes from people paying off debt such as a conventional mortgage or money owing on a line of credit.
Occasionally, home equity is even being tapped to pay off credit card bills, he said, adding that his team had heard from seniors that they are turning to reverse mortgages because new federal stress tests make it tough to secure a line of credit against their homes.
While some might be troubled by the trend that has seniors financing their lives by eating into assets that typically would have been left to children by an earlier generation, the boom has resulted in HomeEquity Bank racking up a portfolio of about $4 billion in reverse mortgage loans.
The lender dipped a toe in selling a bundle of reverse mortgages to another financial institution last year — $75 million worth — to generate funds to make even more loans.
Ranson said he intends to arrange a larger transaction in the first half of this year to continue to feed demand, which he hopes will help originate at least $900 million in new reverse mortgages in 2020.
The aging population’s growing appetite for using home equity to finance their cash and debt needs is borne out by recent figures from the Office of the Superintendent of Financial Institutions, which show that reverse mortgages came close to tripling over the past five years. Reverse mortgages in Canada stood at $3.92 billion as of October, up from $1.35 billion in the same month of 2014.
The trends have also drawn competition for HomeEquity Bank, which had the field virtually to itself for years. Equitable Bank, an alternative mortgage lender that had already expanded with online banking and high-interest savings accounts, just completed its second year in the reverse-mortgage business.
Andrew Moor, chief executive of Equitable, told the Financial Post his company’s portfolio has grown to around $20 million, up 540 per cent in the last year alone.
Moor said his firm entered the field in time to catch the first large wave of workers who are going into retirement without the benefit of a secure defined benefit pension to fund the rest of their lives.
He said he thinks competition will expand the size of the market by creating an environment where more options are made available to entice consumers. In its second year in the business, for example, Equitable began to offer lower rates to clients who take the full amount of money for which they quality.
“It’s a relatively underdeveloped market here,” Moor said in an interview Monday, adding that he believes the size of the Canadian reverse mortgage market could grow by four or five times based on demographic trends and the growth in more developed markets with more players, such as the United Kingdom.
The Financial Consumer Agency of Canada has not weighed in on the use of reverse mortgages, though the agency has directed lenders to ensure they have clear, simple information that is not misleading in their agreements with clients, according to a spokesperson.
The agency also lays out the pros and cons of such arrangements on its website, including extra costs that may be associated with reverse mortgages, such as setup and home-appraisal fees, legal costs, and higher interest rates than a traditional mortgage. The website also cautions those considering a reverse mortgage that the equity in their home may go down as interest on the loan continues to rack up over the years.
Ranson says HomeEquity Bank won’t lend more than 50 per cent of the equity in a home, with a typical loan at closer to 30 per cent of value, and the homeowner keeps any appreciation beyond the loan and interest.
“The amount you owe will never exceed the value of the house,” he said. “If house values fall, we take that loss….That’s the risk we take as the lender.”
This article has been edited for clarity and length.
Author: Barbara Shecter
Insurance & Estate Planning
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