With a reverse mortgage, the existing home equity is used as security for the funds provided by the reverse mortgage. After the reverse mortgage is established, any future growth in the value of the house goes to the homeowner. (If the home falls in value, the reverse mortgage lender takes the loss—the lender guarantees that the borrower will never owe more than fair market value of the home.)
Calculating the impact of the reverse mortgage on home equity thus becomes a function of estimating the term of the loan, the home’s value at the end of that term and the interest payable on the advanced funds.
HomeEquity Bank provides two illustrations for a borrower whose house is worth $600,000 and who takes a reverse mortgage of $150,000 at current five-year rates of 5.59%, repaid after 15 years.
At a modest house appreciation rate of 2%, the homeowner has $450,000 in equity remaining when the reverse mortgage is established, and—due to housing price appreciation – is left with $451,826 in home equity after 15 years. In other words, the homeowner is—in nominal (not inflation-adjusted) terms—“no worse off” at the end of the reverse mortgage term as a result of borrowing from their home equity than they were at the start of the reverse mortgage term.
Using an appreciation rate of 5%, however, the homeowner’s equity grows to $891,662 over the same 15-year period—meaning, essentially, the homeowner’s equity doubles even as they remove $150,000 and pay $205,695 to service the borrowing costs.
||2% annual appreciation
||5% annual appreciation
||In 15 years
||In 15 years
|Remaining home equity
Note: All figures provided by HomeEquity Bank, October 16, 2019. This example is for a lump-sum reverse mortgage with all funds advanced at the start of the 15-year term.
Part of a bigger picture
The growth in reverse mortgages is part of a bigger picture of debt and housing wealth among Canada’s aging population. Statistics Canada data shows that debt for the over-65 crowd has increased sharply in recent years, with the proportion of indebted seniors growing by more than 50% from 1999 to 2016.
Over this period, the average increase in seniors’ debt was $50,000, of which fully 67% was mortgage debt. At the same time, however, the average increase in seniors’ assets was just over $500,000, of which 51.7% is attributable to real estate assets—meaning that seniors’ increased (mortgage) debt is, on average, moderated by their increased (real estate) assets.