The numbers don’t lie: Canadian retirees are tapping into their main asset, their homes, now more than ever through reverse mortgages in order to cope with income-crimping low interest rates and inflationary pressures.
Toronto-based HOMEQ Corp., the country’s only national provider of reverse home mortgages, recently reported a record volume of reverse mortgage originations for the fourth quarter of 2011 ($67.2 million, 42% ahead of Q4 2010) and a 16% annual increase to $239 million of originations for 2011 over the prior year.
The double-digit increases are a function of the environment of low interest rates and higher inflation — as well as the first bulge of baby boomers entering retirement, says Steven Ranson, president and CEO of HOMEQ’s Toronto-based subsidiary, HomEquity Bank. “There are more seniors every year, every quarter,” he says. “There are lots of stats out there in terms of seniors carrying debt. [And higher living costs] and low interest rates makes it hard for them to invest the money they have and generate a reasonable return.”
HomEquity Bank’s typical customers are solidly middle-class couples with home values around the average for their city or town and who need additional income, Says Ranson: “They have been retired for probably five to 10 years, and this is when inflation starts to bite them a bit more. You know they are on a fixed income.”
Financial advisors’ opinions are divided on the rising popularity of reverse mortgages. Kurt Rosentreter, senior financial advisor in Toronto with Burlington, Ont.-based Manulife Securities Inc., views this popularity as a function of some retirees being hammered by either the 80% decline in guaranteed income certificates’ rates in the past decade or poor retirement planning. “[Retirees] are being hurt more by the bond market than the stock market at these kind of record-low rates,” he says. “No. 2 would simply be inadequate savings. People who just don’t have enough, generally, and are looking to stretch their finances — even if it means borrowing and dying with debt.”
Rosentreter, who as yet has no clients who have taken on a reverse mortgage, worries about what rising interest rates and/or another stock market plunge would mean for those who sign up for such a plan. “When you look at everything that has gone wrong in the U.S. in the past three years,” he says, “this is just another example of excessive use of debt to fuel personal greed or personal comfort level when you are living beyond your means. I don’t think these plans should exist.”
Frank Wiginton, a certified financial planner with Toronto-based TriDelta Financial Partners Inc., is more ambivalent about the surge in reverse mortgages. “If you are just doing it without any [financial] planning, then you are getting yourself into trouble,” says Wiginton, who has included the option of a reverse mortgage into the retirement plans of some customers. “We have done plans for [clients] where they have said [the reverse mortgage] is part of the plan.”
UNDERSTANDING THE RISKS
In Wiginton’s view, a paid-off home is a legitimate asset to be borrowed against in an “ultra-low interest rate” environment. However, people need to understand the risks involved with reverse mortgages, he says: “If you are just randomly borrowing against your home to the tune of a couple of hundred thousand dollars, ultimately, you are running the risk of putting yourself in serious debt without any recognition of the consequence should you run out.” IE