As more retirees look to reverse mortgages to get through their golden years, one of the country’s two lenders in the space is now offering more options.
Equitable Bank, which currently has some of the lowest reverse mortgage rates on the market, has introduced the “Flex PLUS.” It’s designed for people who want to tap more of their home equity than a regular reverse mortgage allows.
The chart below shows how these new rates compare with the bank’s existing “Flex” and “Flex Lite” reverse mortgages.
While the new Flex Plus Mortgage option entails higher rates and is restricted to those 70 and over, its biggest selling point is a loan-to-value (LTV) of up to 59%. That’s the highest published LTV in Canada for a reverse mortgage.
That’s more than Equitable’s existing products, and also higher than the 55% published maximum LTV of HomeEquity Bank’s CHIP Max. Although, HomeEquity Bank (Equitable Bank’s archrival) does go above 55%. It just doesn’t publish it, so you have to ask.
Equitable’s added four percentage points amounts to about $28,000 on Canada’s average home value. That extra cash can be appealing to those in their later years who want—or need—cash to cover bills or pay off debts.
Unfortunately, the price of this added four percentage points of borrowing power is steep: 5.69% as of this writing. That’s 0.80 percentage points more than Equitable’s regular 55% LTV offering, albeit less than the CHIP Max at 6.49%.
Why so high for just a little more borrowing power? Equitable Bank’s Paul von Martels says it’s about the “tail risk” of someone outliving the bank’s actuarial expectations (i.e., leaving the bank with a reverse mortgage that has a higher balance when they die than what the home is worth). Furthermore, he says when LTVs grow past 60%, it “results in a material increase in risk weight assets” (which requires more capital to satisfy regulators), adding additional cost to funding the loan. “To offset these costs, Equitable Bank needs to charge a rate premium.”
But is 5.69% worth it for 59% LTV vs. 55%? Not unless you’re desperate for cash and have no other practical options, including downsizing.
Also note, you need to be 79 years old to get an LTV over 54%. At that age, you statistically have about nine years left to live, according to StatsCan. You’d rack up about $54,507 of interest over those nine years, for every $100,000 borrowed, assuming a 55% starting LTV. If you lived longer, then (holding interest rates constant) it would take 20 years before your house was worth less than what you owed on the reverse mortgage. You’d never owe more than what your house is worth, of course, because Canadian reverse mortgage lenders offer a “no negative equity guarantee.”
Equitable Bank notes that its reverse mortgage business has surged more than 400% last year alone.
That shouldn’t be surprising, given the steep climb in home values over the past decade—26% in the last year alone, according to the Canadian Real Estate Association—thereby making a large number of seniors across the country house rich.
A recent survey commissioned by HomeEquity Bank found that 80% of Canadians over the age of 55 believe they can’t rely solely on their registered savings and pension plans to support a comfortable retirement.
That’s where reverse mortgages come in. And lenders are playing right into that by offering higher and higher LTVs.
In 2020, Canadian seniors added $408 million in new reverse mortgage debt, bringing the total reverse mortgage debt outstanding to $4.42 billion, according to data from the Office of the Superintendent of Financial Institutions. That’s a 12.5% increase from 2019 and a whopping 367% jump from $898.5 million in 2011.
And 2021 could be even higher, especially with Equitable Bank and HomeEquity Bank now willing to lend more than ever.