Rosemary Mccracken
Sun
Laura D. Parsons, Area Manager National Business Development for BMO Financial Group, says many of her clients are capitalizing on equity. Photograph by : Greg Fulmes, CanWest News Service
Canada’s baby boomers are planning to downsize their homes — a trend that could have a huge impact on the housing market and home financing if even part of the nine-million-strong cohort move to smaller accommodations.
Signs of the boomers’ downsizing are evident in Royal Bank of Canada’s 14th Annual Homeownership Survey, says Catherine Adams, RBC’s vice-president, home equity financing, in Toronto.
The 2007 survey shows that, of Canadian homeowners who are planning to purchase a home in the next two years, a dramatically increased number said this year that they will be looking for smaller homes — 33 per cent compared with 20 per cent in 2006 and 19 per cent in 2002.
“The baby boomers have built up a lot of equity in their homes,” notes Keith Tongue, senior director, broker and mobile sales, at Vancity Savings and Credit Union/Citizens Bank of Canada in Vancouver. “Many of them got into the housing market years ago and their homes, especially here on the West Coast, have gone up dramatically in value. Many will want to tap that equity in one way or another.”
In its latest survey of financial security, released in December, Statistics Canada found the total value of Canadians’ assets rose 42.4 per cent between 1999 and 2005. The main contributor, StatsCan says, was the increase in the market value of real estate, largely the result of price increases. “The single most important asset for Canadians is their principal residence,” the report adds.
Net worth generally increases with age, partly, StatsCan notes, because many older people live in mortgage-free homes. The survey shows the median net worth of “elderly families” (age 65 and over) was $443,600 in 2005 (up from $343,000 in 1999), while the median net worth of “non-elderly families” was $204,000 (up from $155,000).
But the generation ahead of the boomers, people now in their 70s or older, “has already done much of its home downsizing,” Tongue says. “They’ve moved into condos or smaller bungalows. And the generation following the boomers bought when prices were much higher.”
The boomers may be planning to tap their equity, perhaps moving to smaller homes, but the home financing industry is confident they will remain in the housing market and many will require home financing for years to come.
“I’m seeing a lot of baby boomer clients capitalizing on the equity they’ve built up in their homes,” says BMO Financial’s Laura Parsons. The bank’s Calgary-area manager, business development group, says the boomers are using home-owner lines of credit and other means of financing to:
– Renovate their homes;
– Purchase vacation homes;
– Assist their children to buy their own homes;
– Purchase investment properties, such as downtown condominiums for rentals;
– Invest in the stock market.
“There has recently been some dampening of housing demand, which could have an impact on construction and house prices,” says Paul Ferley, assistant chief economist at BMO Financial in Toronto. “But the housing market is not just dependent on demographics. Income generates strong economic growth. We see increased demand in coming years for vacation properties, adult-lifestyle communities and high-end condominiums as the boomers move into the downtown areas from the suburbs.”
“A lot of vacation property is now being built, especially in British Columbia, for people who are planning to retire and perhaps spend winters out of the country,” Adams adds.
Interest rates are expected to drift moderately higher this year and next, says Ferley. “Beyond that, interest rates are expected to remain relatively steady although this is contingent on inflation remaining close to the Bank of Canada’s mid-point target of two per cent.”
Adams notes the RBC study shows that an overwhelming majority of Canadians believe purchasing a home is a good investment. “And the ‘buy now’ message is coming through loud and clear across all age groups — from 25 through 55-plus.”
Of Canadians planning to buy a house within two years, an increasing number are looking at a shorter purchasing window. “More than half, 58 per cent, of them are saying buy now, don’t wait for next year,” Adams notes.
Recent changes in the mortgage market have made mortgage accessibility better than ever. Amortization of up to 40 years, instead of 25 years, has become available. “The good thing is this allows people to get into the housing market because monthly payments are lower over the longer amortization period,” Adams says. “But the total interest costs are higher over the longer term. Total interest costs over the life of a 35-year mortgage are 50 per cent more expensive than over a 25-year period. It’s a good temporary strategy, but I worry that some people are only thinking about the lower payment and not seeing the entire picture.”
Tongue says homeowners in older demographic groups are now opting to extend their mortgages over longer periods. “We’re seeing some younger boomers, say in their late 40s while their cash flow is still strong, moving into bigger houses and taking out equity to upgrade the property. The boomers have always enjoyed displays of status and a home is most people’s biggest status symbol.”
And 100 per cent financing has been around for a few years. “The fit is for young, professional couples just out of university who have income to support a mortgage but no money for a down payment,” says Parsons. “Although they would only qualify for 25- 35-year amortization, we would help them understand how they can combat interest costs of a longer amortization by increasing payments and making lump-sum payments.”
Canada’s mortgage industry is primed to help the country’s aging population with their housing and retirement needs. Home ownership and home equity lines of credit allow them to finance travel, family needs and retirement living expenses by using the equity in their real estate to secure a higher credit limit at interest rates as low as prime. “Why run up expensive credit card debt when you can have debt at prime?” Adams asks.
A wealth of products are available to encourage first-time homebuyers. Vancity’s mixer mortgage, for instance, allows family members or friends to share the cost of buying a home. “All parties go on title, so you’ll see parents going on title with their adult children and helping them with their mortgage payments,” Tongue says.
Combinations of mortgages and operating lines of credit are also available. “As homeowners pay down the mortgage, they have more money available to them in the operating line,” Parsons notes.
“We’re also helping clients customize their new and existing homes to accommodate them as they age with features such as framing for future elevator shafts, and more accessible bathrooms and kitchens,” she adds.
Adams believes reverse mortgages will grow in popularity in coming years. “For many Canadians, their homes are their largest investment and they’ll need them to finance their retirement,” she says. “They can do this by downsizing to a less expensive home, or by remaining in the home and taking out reverse mortgages.”
Available in Canada to those age 62 or older, reverse mortgages provide holders with lump-sum payments of up to 40 per cent of the appraised value of the home up to a maximum of $500,000 based on age and life expectancy. For those who use them for living expenses, the payouts are tax-free.
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TYPES OF MORTGAGES
Fixed-rate mortgages: Their interest rates won’t change over the term of the mortgage. “They’re great for first-time homebuyers,” says Catherine Adams, Royal Bank of Canada vice president, home equity financing. “There’s no surprises, no volatility. But if you want to pay the mortgage off early, there’s a penalty for breaking the mortgage contract.”
Variable-rate mortgages: The interest rate fluctuates as the prime rate goes up or down. “If interest rates go up, your payment stays the same, but more of it goes into paying the interest so your amortization period increases,” Adams says. “But studies have shown this works in your favour over time — that you’ll have your mortgage paid off faster with a variable than with a fixed-rate mortgage. Canadians, however, have their mittens on and are still shy of variable-rate mortgages. The 2007 survey shows only 13 per cent of those surveyed wanted variable-rate mortgages.”
Open mortgages: This offers holders the flexibility to make large payments or pay off the entire mortgages without penalty. Interest rates are usually higher for this privilege. “Open mortgages are good if you know some cash will be coming your way, but we see very few of them ever getting paid off,” Adams says.
Closed mortgages: Rate of interest and length of term will not change over the term of the mortgage, and they’re generally less expensive than open mortgages, Adams says. Most closed mortgages allow the holder to pay off up to 15 per cent of the mortgage once a year without penalty.
Hybrid, convertible or combination mortgages: These allow holders to change the type of mortgage during its term. “You can have part of your mortgage in a variable- and part in a fixed-rate mortgage to diversify the risk of your interest rate rising,” Adams says.
Conventional mortgages, she notes, have down payments equal to 25 per cent or more of the purchase price of the home. “If you have less than 25 per cent down, you’ll need mortgage insurance,” she says. “One hundred per cent financing is available, but your credit must be clean and you must show you can cover the closing costs.”
© The Vancouver Sun 2007
