The "Bank of Mom and Dad" -- older homeowners who dip into their own wealth to help their Millennial-aged kids rustle up a home downpayment -- has long been a presence in Canada’s housing market.
In fact, according to the Toronto Regional Real Estate Board (TRREB) “gifts from family and friends” accounted for 17% of down payment sources for first-time homebuyers this time last year, and 11% of all buyers in the Greater Toronto Area.
Fast forward to today’s market, and while home prices have softened in recent months, rising interest rates continue to put the squeeze on first-timers. That’s made gifted funds as prevalent as ever -- and Boomers are increasingly tapping into their existing equity in the form of reverse mortgages to make it happen.
“Even over the past year, we saw an increase of about 20% of the share of people saying they were using the funds for a related reason, which was potentially gifting or buying another property, et cetera,” says Vivianne Gauci, SVP Marketing, HomeEquity Bank. “That just gives you a sense of order of magnitude which mirrors some of the other data that you’re seeing in the market around this topic.”
Reverse mortgages are products available to homeowners 55-years-old and up, which allow them to access up to a portion of their home’s equity, between 15 - 60% depending on the loan. The funds only need to be paid back when either the home is sold, or the last borrower passes away or moves into long-term care housing. They’re set at a variable, plus-prime based rate (currently between 7.3 - 8.4%, depending on the term).
Borrowers have the option to take what they qualify for as a lump sum, or portion it out over time as an income or cash flow stream. Given that flexibility, the need to only pay interest on the utilized portion, and tax efficiency -- proceeds are tax-free and don’t push borrowers into a higher tax bracket -- reverse mortgages are increasingly attractive, especially given the current economic climate, says Gauci.
She adds that their increased use for down payment funds has been an “interesting trend” as interest rates rise, and borrowers realize time is of the essence when purchasing real estate.
“You’re helping them [Millennials] do it now versus later on. And now, all of a sudden -- maybe they’re in their 30s or early 40s -- you now have 10, 20 years of home appreciation that your kids can now take advantage of,” she says.
“It could also help kids save potentially on CMHC costs, which we know could be quite significant, so if you’re helping your kid get over that hump in terms of when CMHC stops being a factor, you could be helping them save quite a number of percentage points on the home’s mortgage amount.”
Cassandra Carmichael, a mortgage agent with Matrix Mortgage Global, tells STOREYS that using reverse mortgage funds for downpayment gifts is “very common” among her clientele, which are primarily based in the high-priced GTA. With even entry-point condo units now in the $600,000 - $700,000 range, coming up with a minimum downpayment just isn’t possible for many based on their income and savings alone.
That in turn leads to Millennials staying in the high-priced local rental market for longer, further whittling their ability to save; Toronto rents climbed 23.4% for a two-bedroom in August, to an average of $3,266.
She says she has recommended a reverse mortgage to clients whose parents may be already on a fixed income or without a lot of liquidity.
“They came to the decision… because they did mention that their parents did want to help to some capacity, but they did not have the monthly income to be able to qualify as a guarantor or as a co-applicant -- but they had the equity in the home and were able to gift it,” Carmichael says.
“I have some clients who are providing their equity as a living will, so instead of waiting for them to pass, they are advancing part of their equity ahead of their passing just for their children to get into the market.”
However, given how quickly the cost of borrowing is rising -- the Bank of Canada has increased its Overnight Lending Rate 3% since March, the briskest pace since the mid-90s -- a reverse mortgage does pose some risk. Carmichael says anyone with a loan-to-value close to the 55% threshold isn’t a likely fit in today’s interest rate environment.
“I have seen an impact in the sense that borrowers or clients are concerned that they’ll be left in a negative equity situation, so I have had quite a few calls with clients expressing their concern to the point they want to put that off until the market stabilizes,” she says.
“On the flipside, I have other clients who, they don’t have another option; they’re in a pickle and they really do need access to those funds, but they’re keeping a close eye on it.”