In a surprising turn of events, Statistics Canada data showed older households took on more mortgage debt in the second quarter of the year, compared with the same period last year.

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Households aged 55 to 64 years (straddling the baby boomers and generation X) and households aged 65 years and older saw a 6.5 per cent and 6.4 per cent uptick in their mortgage debt respectively. In comparison, the youngest households under the age of 35 (younger millennials and older generation Z) were the only age group to consistently reduce their balances since the end of 2022.

Experts say there’s a plausible reason for the figures: Higher housing costs are either pushing younger Canadians out of the market entirely, or leading young homeowners to sell, especially as their mortgages come up for renewal.

“That data is just a reflection of the market,” said mortgage broker Marci Deane, president of the Mortgage Brokers Institute of British Columbia.

However, she doesn’t believe older Canadians are buying more to drive the increase in their mortgage debt either, for similar reasons.

Instead, a greater number of older homeowners have been tapping into their home equity to free up cash, Deane said.

The most recent data from the Office of the Superintendent of Financial Institutions — the federal government agency that regulates banks, insurance companies and trust and loan companies — confirms that reverse mortgages are on the rise in Canada, with more than $8.5 billion in reverse mortgage debt outstanding at the end of August 2024. That’s an 18 per cent increase from last year.

“Absolutely, that has been a shift,” said Deane. “I do reverse mortgages in my practice — that part of my business has definitely increased in the last three years.”

What’s driving the uptick in reverse mortgages?

Deane’s clients are mainly from the North Vancouver area, where the average home price is more than $1.5 million, and tend to be more affluent than the average Canadian, with most of their wealth tied up in real estate.

Deane said conversations around reverse mortgages have increased, with more financial planners gaining a better understanding of these products and clients in her area becoming more interested in exploring this option.

The product, which can carry some risk, potential equity and estate issues, and greater borrowing costs for the homeowner, have seen the stigma around them subside, according to Deane.

Reverse mortgages bore a poor reputation for years due to underwater mortgages and people losing their homes in the United States, Deane noted. Lately, she said, more people have been educating themselves about Canadian regulations and how the product works. In Canada, homeowners can only take out reverse mortgages on up to 55 per cent of the home’s value and they must be 55 or older to be eligible.

Unlike a regular mortgage or a home equity line of credit (HELOC), borrowers are not required to make any fixed payments or payments on the interest. Instead, the interest accumulates over time, and they only pay off the debt once they sell, move out or die (in which case their heirs can either pay off the debt and retain the property, sell the home or sign a foreclosure deed and hand over the property to the lender).

If the property declines in value (for reasons outside of the borrower’s control), the lender takes the loss, since they guarantee the borrower will never owe more than the fair market value of the home.

“Now that negative connotation is going away and more people are becoming comfortable with reverse mortgages,” said mortgage broker Leah Zlatkin, board president of the Canadian Mortgage Brokers Association-Ontario.

Deane explained that in the past, many homeowners would benefit from rising property values on their larger homes and then downsize into something smaller once they got older, using the leftover funds from the sale of their original homes to cover their costs in retirement.

But downsizing is no longer providing most older Canadians with the same funds, so they are staying put instead.

Zlatkin has seen more older Canadians start leveraging equity in their homes to invest in other things, such as investment properties or renovations for their primary residence so they can age in place. But she also believes some Canadians are freeing up funds to help their children buy property, as well, and pass on intergenerational wealth while bypassing the tax implications.

Tapping into home equity to help adult kids

Yvonne Ziomecki, executive vice-president, marketing and sales at HomeEquity Bank, which specializes in offering reverse mortgages, said the business has seen a 16 per cent year-over-year increase in Canadians taking out reverse mortgages for gifting purposes.

“Gifting is happening in areas where there’s a lot of value in real estate,” said Ziomecki, such as in the Greater Toronto Area and Greater Vancouver Area. “You need to have a house that’s well north of $1 million.”

Ziomecki emphasized the stark disparity in fortunes, with older Canadians benefiting from the rising equity in their homes while younger Canadians face a rapidly rising barrier to home ownership. As a result, more parents are considering making intergenerational wealth transfers during their lifetimes, often to help their kids with a down payment.

“If you’re a parent in Toronto sitting on a $1.8 million house that’s been fully paid off and you can give your kids $100,000 each to get into the real estate market, you’re still sitting on a $1.8 million home,” she explained. “Now you have a $200,000 mortgage, but (your kids) are … generating wealth.”

That said, Ziomecki said the five most commonly reported uses for reverse mortgages are still paying down debt (about four in five), and then living expenses, renovations and pension-like income.

What are the risks?

Reverse mortgages do not make sense for everyone. For example, Ziomecki said someone who is planning on selling their home relatively soon probably should not borrow against their home equity. People who already have difficulty maintaining their homes should consider that they run the risk of defaulting on their loan if the property falls into disrepair.

Hannah McVean, a certified financial planner at Objective Financial Partners Inc., said older people are taking on risk by acquiring additional mortgage debt, even if this is through a reverse mortgage.
She cautioned that every person’s financial situation can vary, and they should explore all their options before committing to a reverse mortgage.

“Those who are retired often don’t have dependants to provide for, expenses are often lower and the time horizon is shorter,” McVean said. “For those reasons, I would say that mortgage debt is less risky by far for an older person than a younger person.”

On the other hand, an individual aged 55, the earliest age a person can qualify for a reverse mortgage, could still live for another 40 years and go through significant changes in their financial situation, McVean warned.

She noted that the interest rates on this product are typically higher than that of a traditional mortgage, so even though borrowers are not required to make regular payments, they could still face a hefty bill once they sell or move out of the home.

Parents who are planning on leaving their primary residence to their children when they die might not want to take out a reverse mortgage on that property, either, since they will lose some of their equity to the bank, McVean said.

Finally, rising home values benefit a reverse mortgage borrower, with the remaining equity in the home growing, as well. But this may not always be the case.

“The growth in the value of real estate in Canada — Canadians tend to think of this as a given, and it may not be,” she cautioned.

“With so much of a family’s net worth in the value of real estate, you just want to make sure there won’t be any unintended consequences.”

• Email: slouis@postmedia.com

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