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Reverse mortgages are becoming a more popular component in retirement planning despite persistent misunderstandings about the products.
Rising real estate values combined with the ongoing shift to defined-contribution pension plans from defined-benefit (DB) pension plans are boosting the incentive for retirees to access their home equity to stabilize their income and offset market volatility.
Case in point: the total value of reverse mortgage originations for HomeEquity Bank surpassed $1-billion for the first time last year – rising 28 per cent from $833-million in 2020. Originations for its Income Advantage product, which offers regular monthly payments, more than tripled in 2021 – jumping 223 per cent from 2020, when it rose 51 per cent.
“We have reached the point at which there’s a much broader understanding of the product than there has ever been,” says Steven Ranson, president and chief executive officer of HomeEquity Bank in Toronto.
Still, Jesse Abrams, CEO of online mortgage provider Homewise Solutions Inc., says misinformation about how reverse mortgages work is still quite prevalent.
“People think that when you get to the end of a reverse mortgage that the bank is going to take your home away,” he says. “That’s still the impression that everyone has.”
In reality, homeowners are only able to access a maximum of 55 per cent of their equity through a reverse mortgage and cannot access those products at all if they’re younger than 55 years old, Mr. Abrams says. That means it’s impossible for someone to be evicted from their home by a reverse mortgage provider.
Homewise gets roughly 3 per cent of its revenue from reverse mortgages, he says, noting that it’s “still a big leap from zero” since the company only started offering those products six months ago.
While most advisors still see reverse mortgages as a last resort for their clients, according to Mr. Ranson, it’s something some are starting to discuss with their clients more regularly.
Mark Walhout, advisor with Walhout Financial at iA Investia Financial Services Inc. in Aurora, Ont., has been bringing up reverse mortgages more with his clients when discussing retirement income planning.
It’s a product that “more people should be thinking about seriously in the context of an overall retirement plan [even though the] resistance is still very much there,” he says.
“When I raise [the topic of reverse mortgages] with people, it does give them a pause and, mostly, my clients still see them as a last resort,” Mr. Walhout says. “In the same breath, though, not a lot of retirees say they definitely want to leave a million-plus-dollar estate in the form of a property to their kids.”
A report from the U.S. Financial Planning Association published in December showed that including home equity as a source of retirement income can help limit volatility risks that come from drawing down other securities such as equities.
David Jackman, a mortgage broker at Verico Sunlite Mortgage in Ajax, Ont., says part of the reason reverse mortgages are becoming more popular is the shrinking proportion of retirees with DB pensions.
“That means a lot more retirement savings really rests on what the client is able to do for themselves,” says Mr. Jackman, who’s also an insurance advisor at Peak Insurance Services Inc.
But Mr. Walhout stresses there’s still “a lot of psychology” around the subject and admits he hasn’t brought up using reverse mortgages as a non-correlated asset in portfolios.
“People are receptive to the idea that down the road, in retirement, if they want to stay in their home but will need care, [a reverse mortgage] could serve that purpose,” he says. “But as soon as the conversation shifts to how to supplement retirement income or to introduce home equity in a tactical way, I haven’t done it and I don’t know that I would.”
HomeEquity Bank’s Mr. Ranson says there is also a feeling among advisors that they could provide the cash flow their clients need strictly through their own efforts. Mr. Walhout sees things the same way, saying he would look at other things first, such as potentially delaying Canada Pension Plan payments.
“A lot of people haven’t looked at that even though the impact can be huge,” Mr. Walhout says. “I think there are a few things that we would want to do first before we say, ‘Okay, let’s get that reverse mortgage.’”
The main reason clients and advisors alike continue to think that way, Mr. Jackman says, is because they are simply misinformed about the product itself.
“It isn’t until they end up having a conversation with someone who specializes in doing reverse mortgages that a lot of things actually get cleared up,” he says.
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