The need for an improved cash flow in retirement is leading to record number of reverse mortgages in Canada, according to a HomEquity Bank study.
The report released by the only national provider of reverse mortgages in Canada notes its reverse mortgage originations were up 42% in the fourth quarter of 2011. On an annual basis, the company originated $239 million in reverse mortgages, a 16% year over year jump.
As at December 31, 2011, the bank’s portfolio of reverse mortgages of $1.2 billion was 17% higher than at the end of 2010.
“Since its inception 25 years ago, HOMEQ Corporation has analyzed the demographic wave of Canadian seniors and how our business can address these trends,” said Steven Ranson, president and CEO.
“Now, the wave is here and we are meeting seniors’ needs for improved cash flow in retirement. This tremendous market demand is fuelling our strong growth in originations, while our disciplined approach to operating the business is resulting in healthy net income growth.”
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Reverse mortgages are offered to Canadian homeowners 55 and older and have no income, credit or health qualifications. Unlike traditional loans, borrowers don’t have to service the interest or repay the principal for as long as they own their home and are living in it.
Experts like Bryan Yu, economist, Central 1 Credit Union, are watching this trend closely. “It really speaks to the overall economic environment, but also over the longer term we’re looking at the demographic that are involved with reverse mortgages.”
Over the next 20 to 25 years, the Canadians population over 55 years will reach 10 million, Yu says, predicting that retirement tools such as reverse mortgage are going to get more popular.
“Instead of making a downward move [selling property] they might want to stay within the own home and [a reverse mortgage] provides them another tool that allows them to stay in place, but also obtain an income flow from that asset without selling it.”
That said, a reverse mortgage is not for everyone and financial advisors will need to educate their clients who take these out, he added.
“Changing demographics means changing financial services as well and [considering] that aspect, it’s more a question of education,” he says. “Reverse mortgages may not be for everybody, so retirees need to understand what type of products are available, but also what’s good for them in their situation. The role of an advisor in that scenario is looking at all the alternatives in terms of how [retirees] can finance their retirement.”