A recently released report from the Canada Mortgage and Housing Corporation (CMHC) reveals a growing trend among seniors who opt to age in their family homes, delaying downsizing or transitioning to rentals. However, a potential pitfall awaits those who leverage the equity in their homes to meet daily living expenses, as the recent surge in borrowing costs poses a threat to their financial well-being.
Statistics Canada notes that the number of seniors borrowing from their homes has remained steady, even as interest rates surged by nearly five per cent since March 2022. This means that seniors relying on methods like reverse mortgages and home equity lines of credit (HELOCs) are not only facing increased borrowing costs, but the growing balances will compound more rapidly, leaving less capital for downsizing, renting, or passing on to beneficiaries.
Home Equity Bank, the primary provider of reverse mortgages in Canada, has posted five-year reverse mortgage rates that can surpass ten per cent depending on the terms. Notably, reverse mortgage rates tend to be higher than conventional mortgage rates, which currently range between seven and eight per cent.
Conversely, interest rates on HELOCs currently align with conventional mortgage rates. However, the CMHC report emphasizes the potential financial strain seniors might face due to the rising borrowing costs associated with these financial instruments.
Reverse mortgages, available to homeowners aged 55 and older, allow them to borrow tax-free money against a portion of their home's appraised value. Despite maintaining legal ownership, the borrowed amount and accumulated interest must be repaid when the property is sold, transferred, or upon the homeowner's death. The unique nature of reverse mortgages means that instead of the principal amount decreasing over time, it grows.
On the other hand, HELOCs permit homeowners to borrow against their home equity as needed, with borrowing limits of up to 80 per cent of the home's appraised value. While the interest rates on HELOCs are usually tied to the prime lending rate, making them comparable to conventional mortgage rates, their variable nature makes the principal sensitive to interest rate increases.
The CMHC and other stakeholders express concerns about the systemic risk posed by high household debt levels, especially in the event of mass defaults. While lenders stand to benefit from higher rates and debt levels, seniors who borrow against their homes may find themselves quietly squeezed, sinking deeper into debt as their home equity erodes faster than it appreciates.
Under Canadian law, lenders cannot seize a home, but leveraged homeowners, requiring additional funds for living expenses, may be compelled to sell to cover their loans. As the borrowing landscape evolves, there is a need for careful consideration and financial planning, particularly for seniors navigating the complexities of aging in their family homes amidst escalating borrowing costs.
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