Mortgages – Where is tomorrow’s demand?
Feb 11th, 2014 | By Daniela DeTommaso
In an earlier post, we touched on the importance of mortgage assets for lenders, but recognized the fact that demand for mortgages at the borrowing end could be constrained in future as homeowners, both existing and potential, work to get their debt loads under control. To explore further where mortgage demand might come from, we have to think practically from the lender viewpoint. The target market for any mortgage product must have potential scale, there must be a legitimate need for the funds, the nature of the investments need to be secure and that market must be accessible for marketing and sales. Where do all these requirements converge? – Seniors!
Everyone wants to retire someday and everyone wants a reasonable life-style when they do. But not everyone is prepared financially. In a recent survey (see BMO press releases January 30, 2014), almost 90% of those polled planned to rely on CPP/QPP to cover costs in retirement and 31% plan to rely heavily on CPP/QPP, even though the average monthly payout is less than $600. Apparently, the savings just aren’t there. Couple this with the fact that pension plans are getting harder for employers to fund and the fact that many plans have moved from defined benefit to defined contribution and the task of funding retirement looks even more daunting.
But many seniors, even with these financial constraints, have a significant pool of wealth they can tap – the equity in their homes. Using a construct known as a ‘reverse mortgage’, home equity can be converted into secure cash flow to supplement retirement income for a defined period, or even for life. Essentially, you do the reverse of what you did in the first place. You made payments to pay off your mortgage – now you take payments to build up your mortgage. Those payments create retirement income, albeit while diminishing the equity in your home, but you still enjoy the benefit of living in your own home. While this concept is not new, it is relatively under-developed in Canada. Concerns have arisen in early implementations of this product, particularly around seniors losing their home when their equity runs out. But this is a relatively easy problem to solve using proper actuarial calculations and underwriting techniques. The fact is the retirement generation is going to get bigger and live longer – funding retirement is going to be more of a challenge viewed in that light. Home equity is going to come into play sooner or later.
Major lenders have a wonderful opportunity to meet the needs of a very large and expanding market while creating a growing pool of highly secure mortgage assets. What about marketing? Well, to a large extent, the potential borrowers are already customers of a financial institution and likely have been for many years, if not decades. How does a market get more accessible than that? It seems the ‘reverse mortgage’ is a concept whose time has come. It will be interesting to see how and when the lender community responds.