Regulators are keeping an eye on growth of the loans, and say there are risks
More Canadian seniors have been tapping into their home equity for cash to fund their retirements over the course of the pandemic, giving an earnings boost to the lenders that offer reverse mortgages and other similar loans.
One of those, Equitable Bank Inc., reported a 262 per cent year-over-year surge in its reverse mortgage product in first-quarter 2022 earnings announced this week. Altogether, Equitable originated $304-million worth of the loans, up 23 per cent over the final quarter of 2021.
Reverse mortgages typically function like home equity lines of credit and allow Canadians to put up the equity in their home in exchange for a lump sum of cash or a consistent flow of payments.
A housing price run-up spurred on by low interest rates and the desire for more space among many Canadians means homeowners have a burgeoning pile of equity to draw from.
The balance of outstanding reverse mortgages hit a fresh high in February at $5.4 billion, according to regulatory filings by the Office of the Superintendent of Financial Institutions.
Andrew Moor, president and chief executive officer at EQ Bank, said in an interview the pandemic had caused a shift in attitudes toward retirement among Canada’s aging demographic.
“(COVID is) making it less desirable to go in living in congregate situations and people prefer to stay in their homes,” Moor said, something the industry refers to as “aging in place.”
Moor said the idea of a reverse mortgage is starting to resonate more with Canadians as the country catches up with others where it is more prevalent.
“When we got in the business, it certainly seemed to us that this was an approach that was less understood in Canada than other kind of similar economies,” Moor said. “It’s one of the reasons why we got into the reverse mortgage business, we believed it was an under-tapped (market).”
There has been a higher penetration in reverse mortgages in the United Kingdom and Australia compared to Canada, according to Moor, with the U.K. market being five times as large as Canada’s when the target demographic is adjusted on a per capita basis.
With aging demographics in Canada, Moor expects the reverse mortgage market to continue to grow.
He was less certain about any impact that rising costs and decades-high inflation might be having.
“I think it’s hard for us to say,” Moor said. “We continue to see robust demand, I can say that. Whether it’s driven by inflation or by our own selections in the market (we provide to clients)… it’s hard to tell.”
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The rapid run-up in reverse mortgage lending has put OSFI on guard.
In April, it said it had been keeping an eye on these types of loans. More recently, OSFI’s deputy superintendent Ben Gully reinforced the need to consider the risks in such products.
“Our message has been quite simply that (these lending products) are important developments in the market, but they can mask the rising credit risks in books, and so we’ve spent significant time reinforcing those messages over the last couple of years and making sure innovations remain safe and prudent and that our firms that we supervise understand the risks,” Gully told the Financial Post.
Gully added that the organization had been paying close attention to these innovations while clarifying supervisory expectations, some of which are already outlined in the B-20 guidelines.
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