The novel coronavirus pandemic is driving renewed interest in reverse mortgages, as cash-strapped seniors look for financing options and rethink their plans to spend their last years in long-term care homes.
A reverse mortgage allows Canadians aged 55 and over to borrow against their home equity. The loan, which can be taken as a lump sum or monthly income, requires no payments. Instead, principal and interest are paid when the homeowner sells or dies.
In a country where around a third of Canadians approaching retirement say they have no savings, reverse mortgages were already popular. But the health emergency is giving Canadians new reasons to consider tapping their home equity for a no-payments loan, according to the country’s two reverse-mortgage providers.
The demand is coming in part from older entrepreneurs who’ve been forced to shut down or scale back business during the health crisis, according to HomeEquity Bank’s Yvonne Ziomecki. In part, these are workers near retirement who lost their job and fear it will take time to find a new one as they compete with a large pool of younger, unemployed workers, Ziomecki adds.
“These people need to find a way to get through three to six months and then figure out if they’re going to be able to stay in business or get a job,” Ziomecki says.
Some inquiries are also coming in from those who’ve suffered heavy financial losses in the stock market crash, she adds.
But Ziomecki expects demand to pick up significantly in September or October, when the big banks’ six-month mortgage deferral programs will start to unwind. Some older Canadians who anticipate struggling to make up for those deferred payments see reverse mortgages as a possible solution, she says.
That could unfold in two ways. Some borrowers want to use a reverse mortgage as a temporary cash injection to keep up with their regular mortgage as they get back on their feet financially, Ziomecki says. Others are using a reverse mortgage to pay off their conventional mortgage in full, she adds.
Another source of future demand will likely come from seniors who decide against selling their home in order to transition to a long-term care facility, says Paul von Martels of Equitable Bank, which entered the reverse mortgage market in early 2018.
Long-term care settings accounted for more than 80 per cent of the deaths caused by COVID-19 in Canada, according to data from the National Institute on Ageing published in late May.
“That’s been a very scary situation for a lot of people,” von Martels says.
That has increased interest in reverse mortgages as a way for seniors to finance renovations to make their homes more accessible and pay for at-home care, both von Martels and Ziomecki say.
Both HomeEquity Bank and Equitable Bank have devised ways to make mortgage applications compatible with social distancing.
Equitable Bank says it’s now accepting digital signatures even on closing documents, while both lenders say they’ve been able to conduct appraisals without sending personnel into clients’ homes.
Still, both lenders say they expect demand to surge once life has gone back to normal.
But if the financial stress of the COVID-19 crisis could increase the appeal of no-payment loans to older Canadians, worries about property values could be a turn-off.
While home prices throughout Canada have largely held up so far, some believe the economic downturn caused by the pandemic could soon trigger steep price drops.
In a controversial forecast, for example, Canada Mortgage and Housing Corp., the country’s federal housing agency, is forecasting a decline in average home prices of nine to 18 per cent in the next 12 months.
Both HomeEquity Bank and Equitable Bank guarantee that Canadians with reverse mortgages won’t get stuck owing more than their home is worth even in a real estate market crash. If the value of the house is less than what you owe when the home is sold, you or your estate won’t have to make up for the shortfall.
“You wouldn’t be on the hook for it. Your family wouldn’t be on the hook for it,” Ziomecki says.
Canadians can only access up to 55 per cent of the value of their house for HomeEquity Bank and 40 per cent for Equitable Bank.
Still, homeowners who already have a mortgage may not have as much equity remaining if they sell at a time when property values are depressed, von Martels says.
A prolonged period of slow-growing or stagnating home prices would also impact how much of their equity borrowers retain.
Usually, rising home prices mitigate the home-equity erosion caused by the interest charges on a reverse mortgage. For example, even if home prices appreciated by a modest three per cent per year, a 5-year, $100,000 reverse mortgage at 4.99 interest on a $450,000 home would leave a homeowner with $439,000 in equity after 10 years, according to calculations HomeEquity Bank shared with Global News.
That’s because, over the 10-year span, the borrower would pay around $66,000 in interest, but the home would appreciate by nearly $155,000.
On the other hand, if home prices remained stagnant for a decade, the same homeowner would be left with just $285,000 in equity.
For new reverse mortgages, lower home prices mean less room to borrow.
For example, if your home was worth $1 million pre-pandemic and you wanted to access 40 per cent of the equity, you’d be able to get a reverse mortgage for $400,000, explains von Martels.
If that home lost half of its value, you’d only be able to access $200,000, he adds. (However, he adds, the borrower could ask for a re-appraisal later if home prices rose.)
But von Martels notes new borrowers would also be able to take advantage of low-interest rates.
While reverse mortgages typically have higher rates than conventional mortgages, borrowing costs have come down across the board amid the current economic downturn.
Borrowers seeking a lump-sum payment, for example, can get a five-year, fixed reverse mortgage at 3.99 per cent through Equitable Bank.
When the bank entered the reverse mortgage business a couple of years ago, interest rates were around seven per cent, von Martels recalls.
Reverse mortgages, he says, have become “more appealing because the rates are much lower.”