Historical article note: This article was originally published on 2019-08-22. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
According to the latest population census results in 2016, the proportion of elderly people in Canada is steadily increasing. For the first time since a census has been conducted, the proportion of people aged 65 and above has surpassed that of people under the age of 15, marking Canada's official entry into an aging society. British scholars conducted a study showing that since 1840, human life expectancy has increased by an average of two years per decade. Today, 60-year-olds have a 50% chance of living beyond 90 years; children under 10 today have a 50% chance of living to 105 years. The focus of technological and medical advancements used to be on reducing infant mortality; now, the research focus is shifting toward reducing the incidence of dementia in the elderly. As people live longer, this challenges the traditional three-stage life plan of 20 years of education, 40 years of work, and 20 years of retirement. If one retires at 60 and lives to 90, one faces a third of life, a 30-year time black hole. During the long retirement, how should one live, consume, and take care of their health? Housing has always been the most expensive aspect of life consumption. If one unexpectedly lives a long life and has no company pension, relying only on a monthly social insurance of 1,000 Canadian dollars, they can't even pay property taxes, let alone rent. Longevity in poverty and regret becomes a curse rather than a gift. Many people rashly think that Canadians will move out of their large homes in old age, especially detached houses, and sell their big homes at lower prices to younger people. This idea is too idealistic and unrealistic. Elderly individuals are not only reluctant to part with their longtime homes, but if they are healthy, they can use reverse mortgages to draw money from their homes to maintain their lives and can continue living in their large homes for a very long, long, long time…
01 The elderly person is not willing to go to a nursing home for the elderly
In Canada, 17% of the population is over 65 years old. The number of people living in residences with care services or elderly companionship is 426,000, accounting for only 1.2% of the population. It can be inferred that 93% of people over 65 years old do not live in residences with care.
Among the population living in nursing homes, 49% are over 75 years old.
Among seniors over 65 years old, 73% of the population owns their homes, higher than the national average of 67.8%. Among the types of properties in Canada, 53.6% are detached houses. Based on these proportions, Canadian seniors should occupy most of the detached houses.
According to CMHC surveys, among the group of people seriously considering moving to special senior residences after their abilities decline, those currently living in detached houses are the least willing to move. Among seniors over 75, 54% of those living in detached houses are considering moving to a senior home, while 65% of those living in high-rise apartments are considering it. Among seniors over 75, 56% of homeowners are considering moving to a senior home, while 64% of renters are considering it.
From these demographic results and survey conclusions, the hope of seniors moving out of detached houses soon seems difficult to realize. If seniors cannot afford the expenses of a detached house, will it accelerate their move? The answer is also no. Many seniors still have income, support for additional mortgages, and can take out cash from their property rights. The last way to take cash from a house is a reverse mortgage, which can also financially help seniors retain ownership of their detached houses long-term.
It is wise for Canadian seniors to hold on to their homes for a long time. If someone sells their home at 65 and moves to a senior residence or rents, they will miss out on the gains from property price increases, and in case of unexpectedly long life, they could end up in trouble. Senior apartments in Toronto offering Chinese services charge over 5,000 CAD per month for one unit, which is more than 60,000 CAD per year. Choosing to sell a home to live in a senior apartment could be risky; if they live long, it could be disastrous. According to the CMHC SENIORS’ HOUSING REPORT, in 2019, the average monthly rent for senior apartments in Ontario was 3,758 CAD. Paying 45,000 CAD a year in rent, without knowing if one will live long, and selling the home early is certainly an unwise idea. Buying long-term care insurance when young and holding onto one’s home is wise. A house is the end point of wealth, has capital value, and can be mortgaged when cash is needed. Readers are advised to hold on to their homes long-term. Below, we introduce how Canadian seniors use their homes as an asset.
02 Before retirement, your self-occupied home needs to have an additional mortgage and set a credit limit
As mentioned in previous articles, the debt of a primary residence is the biggest enemy in retirement, and the mortgage on a primary residence must be paid off before retirement. If you plan to invest in real estate, you need to pay off the mortgage on your primary residence even earlier, because a primary residence mortgage is consumer debt and directly affects the loan limit for investment properties. Paying off the mortgage on a primary residence can accelerate the building of a real estate investment portfolio, allowing you to accumulate real estate investments during the 5-10 years when your income is highest.
Since the mortgage on your primary residence has been paid off, why still set up a line of credit? The main reason is to prepare for the possibility of 'living longer than expected.' You can't eat your house, and taking money from the house is necessary to maintain daily living. Currently, some banks have rules that if there is a line of credit, even if you don't draw from it, it is considered debt when applying for an investment property loan. If your primary residence has a line of credit, it can affect real estate investment even if unused. Therefore, it is most reasonable to take out additional security on your primary residence and set up a line of credit after establishing a real estate investment portfolio but before retirement, when there is no income.
The credit line for a self-occupied home is a type of revolving mortgage provided by banks after the property has been mortgaged. It can remain effective for a long time without lifting the property mortgage. Some people mistakenly think that this credit line can replace life insurance, which is incorrect. For example, if a couple has an annual income of 200,000 before retirement and uses their property as collateral, the bank provides a credit line of 1,000,000. Under normal circumstances, as long as the mortgage is not lifted, it can be effective for a long time, and any unexpected household expenses can be drawn and repaid anytime. However, if one spouse passes away, the credit line will immediately be frozen and withdrawals will not be allowed, unless the surviving spouse can prove to the bank that their individual income is sufficient to re-approve the 1,000,000 credit line. This bank policy is little known, and readers must remember that a large credit line should not be used as a reason to reduce the amount of life insurance.
There is another type of loan that will not be affected by the death of one property owner in terms of the loan and ownership, and that is a reverse mortgage.
03 Reverse mortgages will play a greater role as life expectancy increases
Reverse mortgages have a long history in Western countries, mainly helping elderly people who did not arrange sufficient credit before retirement to extract cash from their home equity. 'Reverse' means contrary to our usual thinking, for example: 1. Reverse mortgage loans have no monthly payments, so there is no need for monthly repayment; 2. The older you are, the more you can borrow; 3. The lending bank cannot arbitrarily cancel the loan, and after the borrower passes away, if the home's sale price is lower than the loan balance, the bank cannot claim other inheritances. These principles and policies, which are opposite to regular mortgages, ensure that elderly people can safely use a reverse mortgage to withdraw funds from their home.
There are two most important conditions for a reverse mortgage: the age must be over 55, and it must be an owner-occupied home. Elderly people can use a reverse mortgage to withdraw funds for retirement, or to help their children with a down payment for a house. Regarding property rights of a married couple, if one party passes away, the bank will not reclaim the loan nor change the original loan terms. In this regard, it is better than a line of credit.
A detached house in North York, Toronto, worth 1 million, allows an 80-year-old owner to borrow up to 550,000, which is 55% of the house price; for the same house, a 55-year-old owner can borrow up to 235,000, which is 23.5% of the house price. The older the age, the higher the borrowing ratio.
An apartment in North York, Toronto, with a market value of 1 million, allows an 80-year-old owner to borrow up to 495,000, that is, 49.5% of the house price; for the same house, a 55-year-old owner can borrow up to 227,500, that is, 22.75% of the house price. Detached houses have slightly higher borrowing ratios than apartments. It makes sense for elderly people to keep a detached house.
Currently, the 5-year interest rate for reverse mortgages is 5.74% per year, with a handling fee of 1,795 yuan. When the handling fee is converted into the interest rate, the annual rate is 6.02%. This interest rate is much lower than private loans, allowing the elderly to avoid exploitation by high-interest lenders through reverse mortgages.
If a house worth 2 million has a reverse mortgage for 500,000, what would happen? The lending bank will disburse 500,000. If there is still a 100,000 balance on the original mortgage, this reverse mortgage will completely pay off the original loan balance, and the borrower actually receives 400,000 in cash. The total loan amount is 500,000. The borrower does not need to pay any principal or interest but can repay part of the principal at any time. If the interest rate is 5.74%, and the contract is repaid in one lump sum after 5 years, the total principal and interest amounts to 663,526 yuan; if the borrower passes away after 5 years, the loan must be repaid by the heirs according to the will.
04 Reverse mortgages can be used to buy a primary residence
Many people think that reverse mortgages are only for elderly Canadians who are forced to mortgage their homes to cover living expenses and endure high-interest exploitation. In fact, this is not the case. Nine years ago, reverse mortgage interest rates were nearly 10%, which indeed counted as high interest. Today, rates are below 6%, much lower than private loans, and the fees are transparent, 1,795 yuan, also more lenient than private loans. Nine years ago, the minimum age for applying for a reverse mortgage was 62; now it has been lowered to 55, benefiting more elderly people.
Most importantly, current reverse mortgage policies not only apply to additional loans on existing primary residences but also to new home purchases. Suppose an 80-year-old wants to apply for a loan to buy a new home to live in, they can borrow up to 55% of the property price, at 5.74% interest, and a fee of 1,795. Key point: no income verification, only age matters, quickly surpassing all commercial banks and private loan options.
Reverse mortgage services are still not widespread in the Chinese community, and many people are unfamiliar with them. Commercial bank managers can recommend their clients to reverse mortgage banks and help clients understand the details of reverse mortgages. Everyone is welcome to inquire for more detailed information. My contact information is shown in the image below, and I look forward to this financial product benefiting the elderly in the Chinese community as soon as possible.