The Canadian reverse mortgage marketplace doubled in size when the number of commercial lenders went from one to two. The expansion coincides with the first waves of Canada's almost 10 million Baby Boomers turning 60. This is not a coincidence.
Boomers, a population bulge of postwar babies, are now between 42 and 61 years old. The minimum age for commercial reverse mortgage qualification usually starts at 60. Not every Boomer will arrange a reverse mortgage but many will, especially if the principal residence capital gains exemption remains and the home equity conversion industry evolves into an open competitive marketplace.
A reverse mortgage is a financial and lifestyle wealth management tool which enables the homeowner to convert home equity, or the value accumulated in the property, into cash without selling the home or repaying the debt until a preset time in the future. Reverse mortgages are available as commercial products or can be arranged privately.
"One of our main missions is to normalize the product," said Nick DiRenzo, President and CEO of Ontario-based Seniors Money Canada (SMC), explaining why the parent company, Senior Money International (SMI) came to Canada. "There is a large seniors population today -- 13 percent of the population -- and it is going to double in the next 25 years. Secondly, people are living longer more active lifestyles ... . Thirdly, as we live longer, there is a significant need to fund that lifestyle ... . Seniors' number one fear is to out live their money."
Reverse mortgages contradict the old saying, "You can't have your cake and eat it too." With home equity conversion, homeowners can have the "cake" -- the home -- and they can "eat it too" -- that is, take out equity as cash. If the reverse mortgage is a good "fit" and satisfies the homeowner's needs, the cake analogy is complete. Although the reverse mortgage is "consuming" the equity, the property is still owned and enjoyed by the homeowner. ("Homeowner" could also be read as "homeowners.")
Yes, the equity is being eroded and, as we will see, may even be completely exhausted as interest accumulates. However, if this possibility has been taken into account when arranging a reverse mortgage, then the homeowner has decided that having "the cake" and eating it, too, is worth the reduction in equity. That is precisely when home equity conversion using a reverse mortgage is ideal -- when the homeowner knows there is no other acceptable way to have the home they love and cash at the same time.
The long-established Vancouver-based Canadian Home Income Plan Corporation (CHIP) has dominated the home equity conversion marketplace with its reverse mortgage, the Canadian Home Income Plan or CHIP, for years. Although limits, terminology, availability and other significant details vary, CHIP and SMI products are of similar basic design.
New Zealand's Seniors Money International entered the reverse mortgage arena in March 2004. SMI now operates in six countries including Spain, Ireland and Canada, where they introduced their reverse mortgage product in September 2007. In January of this year, the Mississauga-based SMC, which considers a "senior" a property owner age 60 and older, announced its expansion into Western and Atlantic Canada in its move toward become a national lender.
SMI and SMC use the terms "lifetime mortgage" and "home equity release" to describe products since their design enables the homeowner to stay in the home as long as they wish. Allowable equity withdrawals are kept at a low percentage of the total home equity to reduce the possibility that compounding interest will drive total debt above the value of the home. At age 60, a borrower may access 15 percent of equity. At 90, additional equity may be extracted up to 45 percent. Once the assigned limit is reached, no equity may be released but the reverse mortgage is not due and payable until the homeowner moves permanently or dies. If the limit were reached at age 80 and the homeowner lived another 15 years in that home, the debt would continue to increase, perhaps beyond the value of the property.
The SMI "No Negative Equity Guarantee," which is known as the Seniors Money Loan Promise in Canada, guarantees that, even if the loan amount eventually exceeds the value of the property, neither the borrower who decides to move nor the estate if the homeowner dies are responsible for repayment of the debt beyond the value of the real estate.
Reverse mortgages are not as complex as the decisions that surround these financial and lifestyle wealth management tools. The individualized complexity of these decisions often makes small product differences and details important in exacting a fit between a homeowner and a reverse mortgage or in creating a private version.
Reverse mortgages are not right for everyone. However, when a reverse mortgage is the best solution to a problem or the best way to take advantage of an opportunity, nothing else will work as well. The decision to sign up for a reverse mortgage should not be a "quick fix" reaction since discovering if this is a "best fit" involves interwoven financial and lifestyle issues and once-in-a-lifetime considerations.
