Seniors fund children's down payments with reverse mortgages

COVID-19 has sparked a new housing boom and catapulted prices to new heights, but not to be outdone, the banks of mom and dad have adapted with the times.

“We’re seeing that parents who qualify for reverse mortgages are accessing them so they can unlock some of that equity for their kids,” said Daniel Johanis, principal broker of Pekoe Mortgages, adding that mortgages north of $1 million are becoming common. “As soon as you hit $1 million, you don’t qualify for mortgage insurance, and first-time buyers may have the income to support mortgage payments, but where will they find 20% down on a million bucks? That’s $200,000, and that’s a lot of money to save. Reverse mortgages are one way parents are helping their adult kids become homeowners.”

Reverse mortgages are for homeowners at least 55 years old, but the older they are, the larger the percentage of equity they can access. Instead of making regular mortgage payments, the interest they pay is accumulated into the amount owing. Frances Hinojosa, mortgage broker and managing partner at Tribe Financial, says it’s an ideal way for seniors to maintain healthy cash flows without dipping into other investments, like RRSPs. And in the current low interest rate environment—reverse mortgage rates hover around 4%—many seniors have decided to give their children early inheritances.

“COVID is a major life event and people are reevaluating their situations and looking at giving their kids earlier inheritances because it’s a tax-efficient way to both give inheritance and not hurt cash flow,” said Hinojosa. “They’re trying to get their kids into the housing market earlier with those inheritances.”

Although reverse mortgages are being used to help children get a foothold in the housing market—the benchmark price of a single-family detached home in the Greater Toronto Area just hit $1.32 million, according to Altus Group—many seniors, in light of the COVID-19 outbreaks in long-term care facilities, are using them to age in place.

“Some of them have their homes paid off and are tapping into that equity to hire in-house care as an alternative,” said Hinojosa. “I’ve been talking to seniors who have been in their house for the last 50 years and don’t want to cash out. For whatever reason, they want that extra cash flow and this is a great vehicle where they don’t have to make monthly mortgage payments, so their cash flow isn’t impacted.”