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April 23, 2019 | In Reverse

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The news yesterday was that half of Canadians are two hundred bucks from monthly insolvency. But how does that square with a home ownership rate of 70.6%? Or eighty per cent for the disintegrating Boomers? How can people own real estate – which is so damned expensive – and be running out of money? Doesn’t everyone without a house think getting one is the key to security?

It’s the irony of our times. People want stuff. Liquidity scares them. They don’t really think about the benefits of a pile of financial assets until they stop working. Most people have no corporate pension. Nobody can live happy on the government pogey. So retiring with a house and no stash sucks.

No wonder there’s a reverse mortgage boom.

This credit growth is ten times faster than with regular mortgages. Yikes. The outstanding amount will pass $4 billion in 2019, up about 30% year/year. The size of that pile of money has doubled in just three years, and at this rate it will skyrocket in the coming decade. A lot of old farts, in other words, are plunging headlong into very expensive debt after a lifetime of paying it off. So something is clearly amiss.

A reverse mortgage is simple. You get a bag of money to spend on anything and never have to pay it back. In return the lender goes on the title of your house and charges you interest and fees that you never really see. So over time the debt grows – the opposite of a conventional mortgage. The money is eventually returned to the lender when you sell the property or croak, in which case your estate pays.

The advantage is tax-free funds and no payments. The disadvantage is you’re eating up your real estate equity every month. For example, a 70-year-old living in a paid-for $1 million house, qualifies for a reverse mortgage of about $350,000. If that cash lasts for ten years of expenses, at age 80 the reverse mortgage debt will have grown to $670,000. Seven years later it will top $1 million. The heirs will be pissed.

Now, some people are doubtlessly happy with this kind of loan. It papers over the fact they were financially dodgy, plus they get to stay in their home and turn equity into groceries. They also avoid moving into a rented condo one floor above a Mill smoking doobies all day. But, of course, this is a loan of last resort. No reasonable, clear-thinking little old senior would enter their seventh decade with all their wealth in one asset which costs money and pays no income.

The reverse mortgage lender of choice in Canada is HomeEquity Bank. Its customer base starts at age 55 (the younger you are the bigger the loan), and the amount loaned is impacted by house type, value and location. The interest rate on a conventional mortgage may be sub-3% currently, but the geezers are being Hoovered for more than twice that amount – currently over 6.6%. The lender also calculates pay-out costs on a reverse mortgage then folds them into the annual charge. It’s a neat trick that adds about a third of a point.

Reverse mortgages come in two flavours – variable rate (the prime plus at least 2%) and fixed (to a max of five years, then reset at bank rates). Obviously a HELOC (line of credit secured by your home) is cheaper, but seniors living on CPP/OAS likely won’t be offered one by their bank. Nor should they be.

Well this week’s big news is a deal between HomeEquity Bank and the Legion. These days more than half the members are over the age of 65 and, the bank figures, ideal candidates for becoming clients. “We believe in supporting our Canadian Veterans who selflessly served. Enabling Canadians to live the retirement they worked hard for and deserve is part of our core values at HomeEquity Bank,” says CEO Steve Ranson, “which is why we are very excited about this partnership. We look forward to providing Legion members with the opportunity to retire the way they want and in the home they love.”

As stated, a reverse mortgage may work for some. But a predatory rate of interest, hidden charges, silent bloating of the debt obligation and estate destruction do not seem like a veteran’s just rewards.

Lest we forget. Even a bank.

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April 23rd, 2019

Posted In: The Greater Fool

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