Musician John Agius had seen the reverse mortgage advertisements on television for years before he decided to take one out against his own home in downtown Toronto.
That was three years ago, when he was looking for some extra cash to pay for his mother’s funeral and to fix up her house. The costs were high relative to the modest income he earns as a piano composer, performer and teacher.
“I’d never thought I’d have to use it, but glad that it was there,” Mr. Agius, 58, said of the reverse mortgage, which is a loan secured against the value of a home.
The banks weren’t an option for Mr. Agius after a previous business of his went bankrupt years earlier. Meantime, his home, which he paid off in 1978, has appreciated significantly. He took out a reverse mortgage for less than $100,000, at a rate of just under 6 per cent.
“Personally I don’t like debt … but it helped a lot in maintaining a reasonable lifestyle,” said Mr. Agius, who is single and never married. Without the reverse mortgage, he says, “I would have had to sell my home.”
What Mr. Agius likes most about this financial product is that he doesn’t have to make payments until he sells the house or passes away.
“It’s nice to have the option that, if I don’t manage to pay it off sooner, I can stay in my home as long as I wish and retire from here.” Still, his intention is to repay the loan sooner rather than later and he’s already making regular interest payments.
Mr. Agius is one of a growing number of Canadians turning to his home for badly needed cash, whether it’s to help pay for major expenses or, in some cases, to reduce debt.
HomEquity Bank, which offers the CHIP reverse mortgage in Canada, says new reverse mortgages are projected to reach $400-million in 2015 – nearly double 2010’s tally of $205-million. It forecasts new loans will grow between 25 per cent and 30 per cent annually over the next few years.
Still, it’s a controversial product. Critics point to the higher interest rates that are charged compared with standard mortgages or lines of credit, penalties for early repayment and requirements to keep the house in good shape.
HomEquity Bank says current rates range from about 3.95 per cent to 5.49 per cent, depending on product and term. To qualify, you must be over the age of 55. The loan amount can be up to 55 per cent of your home’s current value.
John Eastwood, a notary and estate planner with Eastwood and Associates in Delta, B.C., said he doesn’t have an issue with reverse mortgages, but believes they should be a last resort.
“Where it’s good is for someone who is elderly, who couldn’t otherwise stay in their home,” Mr. Eastwood said.
“If they can use it to enjoy a better life, then I think that’s a good thing – a reverse mortgage is appropriate.”
He doesn’t like the idea of seniors using the money to fund expensive lifestyles, such as vacations or other big-ticket, luxury items. “It’s not inexpensive money,” he said. Mr. Eastwood also notes not all properties values appreciate over the term.
“People considering this type of financing need to fully understand the consequences of what they are doing,” he said.
Aging demographics, high home values drive demand
Some of the trends driving the increase in reverse mortgages include aging demographics, longer life expectancies and insufficient retirement savings, alongside a strengthening of Canada’s housing market over the past 25 to 30 years, according to HomEquity chief executive Steven Ranson.
“With a lot of clients, their principal retirement asset is their house. It has worked out way better than they ever expected,” he said. “It’s a chance for them to monetize it and stay in their house, without having to worry about payments.”
He said about a third of HomEquity clients are looking to pay off their existing debt. That includes loans and mortgages, even if their rates are higher.
“You get the benefit of not having to make payments and never having to worry about the loan maturing, “ said Mr. Ranson. “In return for that you pay modestly higher interest.”
Penalties for early repayment
There are penalties, or what Mr. Ranson calls a “prepayment charge” if you repay the reverse mortgage early. The penalty is 5 per cent in the first year, 4 per cent in the second year and 3 per cent in the third year. After three years, the penalty is three-months interest. There are no penalties if the owner dies, and the penalty is cut in half if the owner can’t handle the upkeep of their home and moves into a long-term care home.
“What we tell people is: ‘If you think you only need the money for a year – you should actually do something else,’” Mr. Ranson said, noting the reverse mortgage is best suited to people who plan to be in their homes for five or more years.
Less financial stress?
HomEquity also promotes the reverse mortgage as a way to relieve financial stress, including mortgage and other forms of debt.
John Laister, 73, and his wife, Jane Ann, 76, got a reverse mortgage earlier this year after their car broke down. The couple have been living in their Burlington, Ont., home for 35 years and Mr. Laister has no company pension., after working in real estate for most of his career. His mobility is also limited as he waits for a hip replacement, and his wife suffers from arthritis.
“My son has been telling me for two years, ‘Dad, it can take some of the pressure off,’” Mr. Laister said of the reverse mortgage.
The couple had thought about moving to an apartment, but don’t want to leave their neighbourhood yet, at least for the foreseeable future.
They used the loan – which was $120,000 at about 5 per cent – to buy a new car, pay off what was left on their mortgage and a line of credit. The way Mr. Laister sees it, the house will likely rise in value to help offset the loan. “It’s a win-win situation.”
Special to The Globe and Mail
Published Wednesday, Nov. 04, 2015 6:58PM EST
Last updated Thursday, Nov. 05, 2015 10:44AM EST