According to the National Institute on Ageing, long-term care facilities were hit particularly hard by the coronavirus. This has made seniors think twice about moving from their current homes into long-term care. A reverse mortgage could, therefore, be a solution to help them stay put by financing renovations to make their residence more accessible, as well as cover the cost of at-home care.
With a reverse mortgage, Canadians aged 55 and over can borrow funds against their home equity. No payments are required, and the loan can be taken as a lump sum or in monthly payouts. The principal and interest are only paid once the homeowner sells the home or passes.
The reverse mortgage option seems to have become more appealing during these times, as about one-third of Canadians nearing retirement age reported they currently have no savings at all.
Who is Considering a Reverse Mortgage?
According to reverse mortgage providers, interest for this option is coming from older entrepreneurs who had to scale down their business or shut down completely due to the coronavirus pandemic.
Inquiries are also coming from workers nearing retirement who lost their job and are now concerned about how long it will take to find a new one, especially when competing against younger unemployed workers. What’s more, people who experienced financial losses in the stock market crash are looking into reverse mortgage options as well.
Experts predict the demand for reverse mortgages will increase in September or October, once the six-month mortgage deferral programs offered by the big banks start to wind down. A reverse mortgage could be a solution for those who think they can’t make up for those deferred payments.
There are two possible scenarios. The first one is borrowers using a reverse mortgage to temporarily keep up with their regular mortgage until they’re financially stable again, and the second one is borrowers paying off their conventional mortgage completely using a reverse mortgage.
Seniors who decide against selling their home and transitioning to a long-term care facility will be another possible source of future demand for reverse mortgages.
In response to the pandemic, reverse mortgage lenders are making mortgage applications possible while maintaining social distancing by accepting digital signatures (even on closing documents), as well as conducting appraisals without in-person visits to a home.
How Do Property Values Weigh In?
While COVID-19 related financial stress is making reverse mortgages more appealing, concerns about property values could put a damper on the demand.
So far, home prices nationwide have remained fairly steady, but experts think the economic downturn caused by the coronavirus could lead to significant price decreases.
The Canada Mortgage and Housing Corporation has forecasted that average home prices will dip 9 to 18% in the next year, though the numbers are expected to recover in the first half of 2021. The forecast also notes that existing housing demand will likely decrease around 19 to 29% (from pre-COVID levels) due to lower employment and loss of disposable income resulting from the pandemic. This is expected to recover later in 2020.
Lenders say that those who use reverse mortgages won’t end up owing more than their home is worth, even if the real estate market crashes – depending on the lender, Canadians can only access about 40 to 55% of their home value.
However, homeowners with an existing mortgage may not have as much equity left if they sell during a period of lower property values. The equity borrowers retain would also be affected by a long period of slow-growing or plateauing prices. Typically, increasing home values help counter any home-equity erosion that is a result of interest charges on a reverse mortgage.
While there are many things to consider when it comes to reverse mortgages, Canadian seniors seem to be seeing them as a way to help weather any potential financial difficulties that might come in the wake of the coronavirus pandemic.
