Ontario Teachers’ Pension just bought Canada’s largest reverse mortgage lender

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Canadian home prices are moving faster than wages, leaving many baby boomers cash poor and house rich. The Ontario Teachers’ Pension Plan Board (OTPPB) must see an opportunity as they buy a large reverse mortgage lender. The pension announced the acquisition of Home equity bank today. It might not be a household name, but their flagship product might ring a bell – CHIP Reverse Mortgages. The lender is the biggest provider of reverse mortgages, which are on the rise again.

OTPPB to Acquire Largest Reverse Mortgage Lender in Canada

The OTPPB announced the acquisition of HomeQ, the parent company of HomeEquity Bank. The bank pioneered CHIP Reverse Mortgages, an extremely fast growing debt product. An announcement was made today, but it is still subject to regulatory approval. Failing that, the deal is expected to close in the first half of 2022. Once closed, the repo will own the largest reverse mortgage player in Canada.

Reverse Mortgages

If you are unfamiliar with reverse mortgages, this is a simple concept. Reverse mortgages are a type of loan where seniors pledge the equity in their home in exchange for money. Lenders deliver the funds in the form of a lump sum or regular payments over the term, as agreed. It is basically a reverse mortgage, much like the name suggests. Another similar product is a Home Equity Line of Credit (HELOC). The biggest difference between a HELOC and a reverse mortgage is the repayment terms.

Unlike a HELOC, a reverse mortgage does not require regular payments. Typically, payment is only required after death, default or sale. In return for generous payment terms, the lender charges higher interest rates. This makes sense from the lender’s point of view since they have no idea when they will be paid back. From the borrower’s perspective, this may not be the best option.

Borrowers have a few issues to consider: it ignores your income, and it’s expensive. Being on a fixed income with not a lot of money, but a lot of equity is a dangerous combination. Borrowers who don’t have a repayment plan, or who use it to fund their retirement, can see their equity wane quickly. This can leave the borrower with much less funds than expected.

Canadians owe $ 4.83 billion in reverse mortgage debt, and it’s climbing fast

More cash-poor, housing-rich baby boomers are looking for reverse mortgages. The outstanding reverse mortgage debt balance reached $ 4.83 billion in July, up 12.46% from a year ago. This is a new record for reverse mortgage debt.

Canadian reverse mortgage debt

The total reverse mortgage debt held by regulated financial institutions, in Canadian dollars.

Source: Regulatory filings, Better Dwelling.

The growth rate also deserves a quick mention. The annual growth of 12.46% in July is the highest level since October 2020. Except that at the time, the market was showing a deceleration in growth. We are now looking at a sharp acceleration in growth. As the cost of living rises faster than CPI-indexed pensions, this is poised for a higher run.

Change in Canadian reverse mortgage debt

The annual percentage change in reverse mortgage debt held by regulated financial institutions.

Source: Regulatory filings, Better Dwelling.

Reverse mortgage debt is expected to grow tremendously as the Canadian population ages. Home prices have long exceeded incomes and now represent the number of people closing the gap. Expensive housing also means that fewer people will have funds for something other than a house. This is a huge growth opportunity for the pension. It’s ironic that one pension makes a big bet on others who don’t have enough in retirement.

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