It’s a problem — home-owning Canadian seniors retiring with reduced income but healthy levels of consumer and mortgage debt — that seems to contain its own solution.
The solution: consider the house as an asset like the others and use it as a way of managing your financial affairs, a move that could make for a more carefree retirement.
And that solution doesn’t require the homeowner to sell the house. All that’s required is the decision to turn an inactive asset into an active asset — all part of a tax-efficient plan to integrate the house with other investments including pensions and RRSPs.
That was the message delivered this week by Steve Ranson, chief executive of HomEquity Bank, to the annual conference of the Canadian Institute of Financial Planning held in Ottawa. He also made the rounds on Parliament Hill.
“If you are sitting on a large gain on your house, you need to think about how do you use the equity built up in your house to help enjoy your retirement. You have all this debt on which you are making payments. How do you find a way to manage it,” asks Ranson, whose bank is the country’s only provider of reverse mortgages.
Those mortgages provide a cash infusion to home owners, allowing them to remain in the house, to pay off their existing debts with the final settling up coming when the home owner passes.
‘The real benefit (for seniors who take out a reverse mortgage) is that they are not making monthly payments. It frees up their after-tax cash flow,” said Ranson, whose presentation was the first he has made to CIPF’s annual conference.
Ranson argues those nearing retirement also need to assess their situation and determine how it could be managed. Reverse mortgages — which have their own set of complexites, their own set of rules on how much capital can be provided and which may not be suitable for everybody — can play a role.
HomEquity’s message seems to be getting through. The schedule 1-chartered bank which is owned by Birch Hill Equity Partners, doesn’t report detailed financial results. It does, however, report changes in the number of mortgage originations: In late April (when it last reported), it said that originations had grown by 27 per cent over the past year. For 2016, the year-on-year increase was 26 per cent with $459 million in mortgages issued, a level that represents its best ever since it became a bank in 2009. Ranson, who noted that HomEquity has referral relationships with the Big Six banks and with the key mortgage lenders, said its outstanding mortgages are about $2.5 billion. It has 14,000 clients with an average new mortgage being about $125,000.
“It’s the way it’s meant to work,” noted Ranson, adding there has been an increased market acceptance in part because of more numerous ways that the homeowner can receive the proceeds. (For instance, all doesn’t have to be taken up-front.)
As well, market acceptance has occurred because some of the myths about reverse mortgages have been dispelled. (One myth: the bank and the homeowner share in the appreciation while the mortgage is in place. Another is that HomEquity owns the house.)
Prior to his speech, HomEquity presented a snapshot of debt and home ownership among Canadian seniors, with data sourced from Equifax Canada. The key statistics: About 15 per cent of seniors have mortgage debt and about 17 per cent have car loan debt vs. 34 per cent for non-seniors.
For unsecured lines of credit and home equity lines of credit, the numbers are comparable for seniors and non-seniors. On average seniors owe almost $30,000 in total debt with B.C. residents have the largest per capita and Manitoba the lowest.