Retiring baby boomers are increasingly giving up equity on their home by taking out reverse mortgages – and the outstanding balance of debt from these mortgages has almost tripled in the last five years.
Reverse mortgages work by allowing retirees to borrow against the equity on their home – either in a lump sum or in scheduled monthly payments. Repayment on the loan happens in the event of the death of the borrower, or sale or default on the home.
Read more: No brakes on Canada's reverse mortgage growth so far
Despite the generally higher interest rates, reverse mortgages are growing in popularity – and according to a report by Better Dwelling, reverse mortgage credit is growing at almost ten times the annual pace of conventional mortgage debt.
According to Better Dwelling, filings from Office of the Superintendent of Financial Institutions (OSFI) showed that the outstanding balance of reverse mortgage debt was $3.51 billion in January, which was a 0.82% decline compared to the previous month. However, it still represented a 30.44% increase compared to a year earlier. Over a five-year period, that figure has nearly tripled.
“The balance of reverse mortgage debt is still relatively small but is growing fast,” said Better Dwelling. “Even at the ‘reduced’ annual pace of growth, seniors will accumulate another billion by next year. Considering the size of debt in Canada, it seems like a drop in the bucket. However, it’s still a sign that older consumers are turning to very expensive debt products. Not something healthy, diversified households typically do in retirement.”