How much do you really know about reverse mortgages? Maybe you know that reverse mortgages can help Canadians 55+ access the equity in their home, tax-free. Maybe you know that tens of thousands of Canadians are using a reverse mortgage as part of their financial plan. But did you know that there are 7 common misconceptions when it comes to understanding reverse mortgages in Canada. As Canada’s leading provider of reverse mortgages, HomeEquity Bank can help set the record straight.

common misconceptions about reverse mortgages
1. If you have a reverse mortgage, you no longer own your home

Nothing could be further from the truth. You always maintain title, ownership and control of your home – HomeEquity Bank simply has a first mortgage on the title.

2. You will owe more than the value of your home in the end

Also, untrue. Every CHIP Reverse Mortgage from HomeEquity Bank comes with a No Negative Equity Guarantee(1) which states that as long as you – the homeowner – have met your obligations, the amount you will have to pay on the due date will not exceed the fair market value of your home. In fact, over 99% of HomeEquity Bank’s customers retain equity in their home when they decide to sell, with over 50% of the home’s value remaining after the loan is paid back (on average).

3. Only people younger than 62 can apply for a reverse mortgage

In Canada, the CHIP Reverse Mortgage is available to Canadian homeowners aged 55 and older. In fact, as you age you are more likely to qualify for a higher amount on your loan. A reverse mortgage is a lifetime product and as long as the property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is living in the home full-time, the loan won’t be called even if the house decreases in value.

4. Failure to make payments can result in eviction

This myth is one of the most common when it comes to reverse mortgages. The CHIP Reverse Mortgage does not require any monthly payments, meaning you can’t miss payments in the first place.

5. Arranging a reverse mortgage is very expensive

This is also untrue. Much like a conventional mortgage, an appraisal of your property and independent legal advice is required, and your responsibility to pay for. The only remaining cost is a one-off closing and administration fee. When you compare this to the costs of “rightsizing” to another home, you will find a much more affordable option in a reverse mortgage.

6. Reverse mortgages have much higher interest rates than conventional mortgages

While it’s generally true that interest rates are a bit higher than a traditional mortgage, the difference is not excessive. Plus, making monthly mortgage payments is simply not a viable option for many retired Canadians, and – even if it were – many would struggle to qualify for a traditional mortgage in the first place. For these reasons, many retired Canadians are choosing reverse mortgages over conventional solutions.

7. You won’t be able to pass on your home to your children

The idea that your children won’t be able to inherit your home is a complete myth. Your heirs will always have the option of keeping the property by paying off your reverse mortgage after you pass away. Plus, HomeEquity Bank’s No Negative Equity Guarantee, (1) states that if the home depreciates in value and the mortgage amount due is more than the gross proceeds from the sale of the property, HomeEquity Bank covers the difference between the sale price and the loan amount. Therefore, you will never owe more than the fair market value of the home.

To find out how much you could qualify for, try our reverse mortgage calculator, or contact your DLC Mortgage Professional.

[1] The guarantee excludes administrative expenses and interest that has accumulated after the due date.

Written By: Agostino Tuzi
Post Sponsored by HomeEquity Bank

Life happens. Protect your family and the family home to ensure
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This is an optional term insurance which ensures that if there
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Q4 economic growth was much stronger than expected, as was the flash estimate for January ’21. This could help explain why interest rates have risen so fast recently and could portend a more optimistic statement from the Bank of Canada next week.

This morning’s Stats Canada release showed that economic growth in the final quarter of last year was a surprisingly strong 9.6% (annualized). The surge in growth in January was even more interesting, estimated at a 0.5% (not annualized) pace. If these numbers pan out, it means that Canada did not suffer a contraction during the second wave and ensuing lockdown.

The January figure is noteworthy in that retail sales plunged as nonessential stores were closed in key parts of the country as we faced surging numbers of COVID cases. The strength came from resources, housing and government spending and the mild weather likely helped.

At its last meeting in January, the Bank of Canada (BoC) estimated that Q4 growth would come in at 4.8% (half the actual 9.6% pace) and that there would be a net contraction in Q1 of this year. The strength in Q4 emanated from very hot housing, some business investment in machinery, government outlays and a resurgence in inventory accumulation. Inventory build-up is often seen as a negative sign reflecting weak consumer spending. But maybe firms were preparing for a considerable rebound in demand.

Economists on Bay Street are upwardly revising their growth forecasts for this year, and no doubt the BoC will do so again when it meets next Wednesday. Clearly, the economy has been more resilient than expected. Will that change the Bank’s assessment of the continued need for monetary stimulus? Probably not. But it will likely temper their view that the next rate hike will not be until 2023, a sentiment the BoC has asserted regularly in the past.

Consumer spending was weak at the end of last year, not surprisingly given many stores were closed and a stay-at-home order was in place in several highly populated areas. Households have been hoarding cash. The savings rate declined to 12.7% in Q4 from as high as 27.8% earlier in the year, but that is still way above normal. Accumulated savings will provide a backstop for robust consumer spending once the economy opens up.

For all of 2020, the Canadian economy contracted by 5.4%–a substantially harder hit than in the US, which posted a 3.5% decline.

Bottom Line

The stronger-than-expected economy raises the potential that there is enough stimulus in the economy. The Trudeau government appears to be determined to hike government spending meaningfully in the next federal budget (likely coming this Spring). We know it is the government’s predilection to juice the economy for another couple of years, but that could well deserve a rethink.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

I’ve got good news and bad news. The bad news is: we’re not getting any younger. The good news is: we’re not going away anytime soon, either, as life expectancy for Canadians is higher than ever before! At least, I think that’s good news—check back with me in 2050 and let’s see how we all feel about it.

Globally, we’ve hit astoundingly high population numbers for people aged 65+, exceeding a threshold of 672 million people (about 8.9% of the total population) in 2019. That’s an increase of more than 500 million compared to 1960 when there were about 150 million people above 65+ globally (roughly 5% of the global population). Oh yes, that’s a whole lot of people.

In fact, it’s only going to get more crowded as the years go by, with the UN estimating that the number of older persons (above 60) is projected to reach 2.1 billion by 2050. And we think it’s crowded now!

This brings us to Canada’s own ageing population: according to Statistics Canada, “seniors are expected to comprise around 23% to 25% of the population by 2036, and around 24% to 28% in 2061”. With a shrinking working population supporting that ~25% segment, the precise economic implications are too varied to be certain of any firm outcome. What is certain is that the older members of our population will need a place to live, which will have a significant effect on Canada’s real estate landscape.

EFFECTS ON THE SUPPLY OF REAL ESTATE
Our ageing population affects the supply of property in the real estate market in several interesting ways. The expectation was that baby boomers would find themselves living in large homes with more space than they needed once they’d retired and their children moved out. At that point, they were supposed to sell their property and downsize to smaller (or less expensive) homes. This influx of property into the market (projected to be half a million homes) would help meet rental or purchase demand, in some cases allowing developers to re-purpose the property into larger, higher density structures (especially in cities).

However, changes to the real estate market may significantly affect how that scenario plays out in reality.

Small condos and detached or semi-detached townhouses used to be prime candidates for someone looking to downsize. Now, rising real estate prices (especially in cities like Toronto and Vancouver) can make this an incredibly difficult endeavour.
Millennials (and soon Gen Zs) have begun to move back in with their parents, as they struggle to contend with exorbitant rent prices, lack of steady work, and extremely high property prices. It’s proven economical for them to live at home rent-free (or at least, with a much lower rent) and save their money to put towards buying homes of their own later.
With more reasons to remain in their current homes (such as their kids moving back in with them), as well as high property prices and a lack of suitable options to downsize to, older homeowners are increasingly choosing to hang on to their property. This, of course, delays the timeframe in which their (usually larger) homes will be released into the housing market, which in turn will further exacerbate property shortages.

EFFECTS ON THE DEMAND FOR REAL ESTATE
Our ageing population has implications for the demand side of the real estate market as well. Accessible property, for example, will increasingly grow in demand as people get older. Fierce competition in the housing market has made it difficult for older people to acquire suitable apartments or houses that cater to their needs (such as, ground floor units or accessibility-friendly rental housing).

Affordable, smaller housing with room for live-in or part-time caregivers, especially in close proximity to essential services and infrastructure (health services, public transit, malls/grocery stores, etc.) will become much more desirable as our population ages.

Some of this demand will likely be met by the government, as it works to fund the construction of homes for senior citizens through the Canada Mortgage and Housing Corporation (CMHC). This will prove vital in the years to come, as increasing numbers of modest to middle-income Canadians retire and start being priced out of the normal rental market. However, with Canada’s population projected to increase at a sharp rate until the middle of the century, we’ll need more than just government intervention to address the issue.

FINAL THOUGHTS
The effects of an ageing population on Canada’s own future will be far-reaching, but impossible to predict definitively. That’s not to say we don’t have a good idea of what the likely outcomes are—we’ll need more housing, and we’ll need to be able to support older Canadians, to name two—but nothing about the upcoming decades is written in stone. The manner in which our government addresses social security issues, housing crises, and indeed, which government we even have in power will all play a role in securing stability or uncertainty.

Any speculation on the effects of projected population growth figures should be tempered with the understanding that they’re precisely that: projections. Not everyone agrees with the UN’s assessment of rampant increases, arguing that we might see a return to “normal” population levels towards the end of the century instead of endlessly spiraling into overpopulation. But whatever the outcome, it’s important that we’re paying attention.

Bond yields and commodity prices surged around the world yesterday as confidence in a vaccine-induced rebound increases.

Canadian 5-Year Bond Yield Surges
In an unprecedented move, bond yields are spiking around the world. Yields globally are now at levels last seen before the coronavirus spread worldwide. At the same time, commodity prices are surging, including energy, metals and minerals, agricultural products and lumber. The Biden administration’s $1.9 trillion stimulus package has triggered fears that if the US economy returns to full employment too quickly, inflation might be the result.

Central banks have attempted to soothe markets, with European Central Bank chief economist Philip Lane saying the institution can buy bonds flexibly. Fed Chair Jerome Powell called the recent run-up in yields “a statement of confidence” in the economic outlook. Bank of Canada Governor Tiff Macklem told us earlier this week that it’s a long road to recovery for the Canadian economy. The Bank of Canada will continue to provide support every step of the way. Many Bay Street economists took this to mean that he reinforced the BoC’s commitment to keeping the policy rate at its effective lower bound of 25 bps until sometime in 2023.

These global developments have sideswiped Canada. On Tuesday, I warned that the 5-year government bond yield had risen 27 bps to 0.69% since the beginning of this month, shown in the first chart below. This morning, the rise has become exponential, hitting 1.00%, shown in the second chart.

Keep in mind that Canada’s economy has considerable slack with unemployment rising in recent months and the lockdown continuing for at least a couple more weeks in the GTA. Moreover, Canada has fallen far behind other countries in the vaccine rollout. But there is no denying that pent-up demand in Canada is high. Not only have home sales been breaking records, but auto sales and anything housing-related–such as Home Depot earning growth–have skyrocketed.

Savings rates are high, and the big banks have reported a surge in deposit growth as consumers squirrel away those savings. Remember, the Roaring Twenties was a response to the 1918 Pandemic, more than anything else.

The CRB commodity price index, shown below, is on a tear, and the gains are in every sector except gold and orange juice. That means that new home construction costs are also rising, as home sales remain well above listings.

Bottom Line

It’s time to lock-in mortgage rates. For those in the market, preapprovals are prudent. Rising rates will likely trigger more housing activity in the near-term as those thinking of buying might move off the sidelines, pushing prices higher over the first half of this year.

The surge in interest rates would undoubtedly stall or reverse if we see a third wave of new variant COVID cases in advance of a full rollout of the vaccines in Canada. However, there is enough monetary and fiscal stimulus in global markets, and oil prices are expected to continue to rally sufficiently that an ultimate rise in interest rates cannot be far off. This is indicated by the loonie moving to a near a 3-year high.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres