Mom money

Ruth is 72. Spry. Her kid, Marion, is 44. Worried. Harold, husband and father, checked out eight years ago. Dead. No pension, but he left his wife of forty years a nice house.

“I’ve pleaded with her to sell it,” says M, “and even suggested she read your pathetic blog, but nothing works. This week mom told me she’s got a reverse mortgage for some ridiculous amount – like $500,000 – and I should mind my own business.”

So mom has no income other than government OAS pogey (she never worked, no CPP) and lost her part-time job at the library. In other words, she’s broke – living in a million-dollar place which she can’t afford to heat. Or pay the property taxes on. But it’s home.

Ruth ain’t alone. Thousand of wrinklies are making exactly this choice – deciding their best option is to dig into real estate equity to compensate for a dearth of savings, investments or pension income. In doing so they reap the fruit of housing inflation at the same time taking on debt that will eat its way through their net worth and their kids’ inheritance.

It’s time for a reverse mortgage update because, well, the old hippies are going nuts over them.   The amount of debt taken on in the last five years has tripled – to about $4 billion. Back in 2014 it was just $1.3 billion, which makes reverse mortgages the fastest-growing form of borrowing. For example, five years ago HomeEquity Bank (the CHIP people) was handing out about $300 million a year to the Geritol set. This year they expect to hit $900 million in new originations. And there’s competition, too, since Equitable Bank got into the RM business a couple of years ago.

Here’s the deal: people over 55 can borrow up to 55% of the equity in their homes and use the money for whatever. No payments. No repayment until they sell or croak. The funds are not taxed. It seems like a dream since they get to stay in the same house and can stop sharing meals with the cat

But it’s debt. Debt costs money. In this case the rate of interest is extreme – 5.6% or twice the cost of a conventional five-year mortgage. Since no payments are being made, the debt grows and grows with all of the accumulated interest added to the outstanding principal. So a $150,000 reverse mortgage becomes a $200,000 obligation after five years. Plus there are substantial set-up charges when the deal is arranged.

Why would someone opt for this when a conventional mortgage is cheaper or a HELOC can be arranged with much lower simple-interest payments and no increase in the debt?

Simple. It’s the new reality for wrinklies – the majority retire without pension plans, without adequate savings or investments and too much reliance on the public purse. People vastly overestimate the amount they’ll get from CPP or OAS and figure if they stop working and have a paid-off house they’ll get by – no matter what.

But houses cost a heap. Maintenance, utilities, insurance, property tax – everything’s getting more expensive, and meanwhile all that equity is producing zero income. There’s also the stress test in place, preventing people who are house-rich and income-starved from qualifying for traditional mortgage financing. Outfits like HomeEquity and Equitable Bank are exempt from that test when they hook new clients. All that matters is a piece of real estate with value in it that can be Hoovered out.

Of course, once the debt is in place, it stays forever. Seniors having a hard time buying home heating oil or groceries are unlikely to ever pay down a reverse mortgage. So when they sell or, more likely, die, their estate is responsible for it. Surprise, kids!

The lenders think they have an outstanding business opportunity, given the fact there are 9.6 million Boomers in Canada. At the same time only 25.3% of all working Canadians have a defined benefit pension – one that will yield a known and continuous income stream in retirement. Worse, a record number of retirees are now going into their post-employment years with consumer debt in place. Many have real estate, lousy savings and poor income. So, what are they thinking?

Mortgage debt in Canada is rising by about 5% a year. That’s a worry since we already owe $1.2 trillion. But reverse mortgage debt’s increasing at 25% every 12 months. And every single borrower is (a) no spring chicken and (b) doing it because they have to.

What should Marion do?

Mind her own business, of course. Like mom says. It’s her asset to squander. Being old doesn’t make you right. Just a tasty target.