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June 25, 2019 | Eggs

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.

It’s fair to say yesterday’s comment section convo unscored a theme: resentment. A whole generation of people genuinely feel short-strawed. They’re anti-corporate iconoclasts believing Boomers won the birth lottery, then fashioned an economic and financial system rigged in their favour.

Pensions are gone. Careers are now gigs. Houses nobody can afford. Surely life was simpler when real estate cost three times what you make in a year (not 10 or 12 times), when people stayed in lifelong linear careers, saving nothing and could still retire with a monthly cheque.

Well, if that was ever actually the case a whole mess of Boomers have royally screwed up. It’s getting ugly out there among the sixtysomethings. They put too many eggs in one basket. And there’s a lesson here.

This week a big financial company reported that nearly half (46%) of Boomers getting ready to retire will still be carrying a whack of mortgage debt when they do. This is historic. Like two feet of snow in Colorado in June. Something’s changing. In fact, 70% of people now say they won’t actually stop work when they ‘retire.’ They can’t.

Plus, that ‘freedom 55’ thingy is largely toast. Fewer than 40% say they’ll retire before hitting 65. No surprise. Over 70% of people on the cusp of leaving their jobs have no financial plan. Not much to be proud of here, or for the moisters to be hostile about.

And it gets a little more depressing when you look at what a slew of the old farts are doing with the real estate they lucked into. Reverse mortgages are now the fastest-growing source of debt. Up more than 28% in the past year, to an outstanding balance that’s approaching $4 billion. No coincidence that Old People’s TV (CBC News Network, BNN) is riddled with CHIP HomeEquity Bank commercials. Lots of old fogeys have houses, yes, but they don’t have enough money to live on.

A reverse mortgage is just that. You get a bag of money from the lender who gets to place a lien on your house in return. However that’s just the start. The mortgage has an interest rate attached to it, so the debt grows in size every year. The wrinklies are sucked in with the promise of ‘tax-free cash’ and ‘no monthly payments.’ It just seems so…free.

But, alas, it’s a trap.

The prevailing reverse mortgage rate this week is 6.3% – or more than twice the cost of a conventional mortgage. Added to that are closing and administrative fees which are tcked onto the principal, amortized, put through a blender and a spin cycle and result in an effective rate of 6.63%

So a reverse mortgage of $150,000 becomes a debt of $210,000 five years later. Imagine if the naïve seniors burn through that amount of cash during the term – thirty grand a year – only to find that they owe 30% more than was borrowed. The only way out is to sell the house and pay off the debt or borrow more (up to 55% of the equity in a home can be siphoned off by the blood-sucking proboscis of the bank). Of course, the bigger the reverse mortgage the less money that’s available for the kids when the Boomers croak. And therein lies the true tragedy. Maybe there’s a app…

There are options to the reverse mortgage. A home equity line of credit can be had in the 4% range, requires interest-only payments, and the debt doesn’t get any bigger over time. The money can be invested to produce income (making the interest tax-deductible), used to pay off higher-cost debt or frittered away on having a good life. Most HELOCs are variable-rate, but that’s okay given the potential for a reduction in the cost of money.

Or, better, you can sell the house. The market is generally okay (outside of Vancouver), mortgage rates have plunged, the stress test rate is about to be reduced, the RRSP home buyer limit was just goosed and the weather finally improved. This is a powerful mix. If central bankers are correct and economies cool off in 2020 and beyond, conditions later might be less favourable. Think about it. Take the pile of dough, invest it and let the portfolio pay your rent.

As for the kids, watch and learn. If a mess of Boomers couldn’t turn real estate into financial security even given their favoured lives, how can you expect a different outcome? Houses are costly, inflated, omnivorous assets. Become your parents at your peril.

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June 25th, 2019

Posted In: The Greater Fool

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