Key facts
- High interest rates reduce the principal limit factor in reverse mortgages, allowing borrowers to access less of their home's appraised value.
- Higher rates cause loan balances to increase faster, potentially depleting equity for borrowers or their heirs.
- Affluent borrowers are increasingly using reverse mortgages for financial planning, taking advantage of growing lines of credit.
- Proprietary reverse mortgage products are gaining traction, offering higher loan amounts than traditional Home Equity Conversion Mortgages (HECMs).
- The loan-to-value ratio for a 62-year-old borrower has dropped from approximately 50% when rates were around 3% to about 30% with rates near 6%.
High interest rates are altering the landscape for reverse mortgages, impacting loan accessibility and borrower behavior. Unlike forward mortgages, higher rates in reverse mortgages do not increase monthly payments but instead lower the principal limit factor (PLF), reducing the amount of home equity borrowers can access upfront.
This means borrowers receive less cash, and loan balances grow faster over time, potentially diminishing remaining equity for them or their heirs. For adjustable-rate lines of credit, unused credit lines grow faster, but this accelerated balance growth can still deplete overall equity more quickly. Shain Urwin, national manager of reverse mortgages at C2 Financial, noted that more affluent borrowers are taking advantage of this growing line of credit in the current high-rate environment.
Needs-based borrowers, however, are less psychologically impacted by interest rates as their immediate financial needs dictate resource access. Many of these individuals possess significant home equity but struggle with inflation. Urwin highlighted that during the COVID-19 pandemic, when rates were around 3%, a 62-year-old borrower could secure a Home Equity Conversion Mortgage (HECM) with a roughly 50% loan-to-value (LTV) ratio. Today, with rates near 6%, this figure has fallen to approximately 30%.
Loren Riddick, national director of reverse lending at NEXA Mortgage, reported a surge in business as seniors recognize the vast amounts of untapped home equity. He noted that some borrowers actually prefer higher interest rates because the line of credit growth rate is consistently 0.5% higher than the interest rate, currently resulting in about a 7% growth rate on unused credit lines. Riddick observes a trend towards wealthier, more educated clients using reverse mortgages for financial planning, with his business now seeing about 70% non-needs-based borrowers, compared to a 50/50 split for NEXA overall.
The traditional HECM remains the dominant product, holding 60% to 70% of the market, while proprietary products make up the remaining 30% to 40%. Roughly one in five reverse mortgages are used for home purchases, a ratio Riddick hopes will increase to help free up housing inventory. Kim Smith, senior vice president of wholesale lending at SmartFi Home Loans, stated that proprietary products, such as SmartFi's Choice program, offer higher loan amounts than HECM in the current rate environment, fueling their growth. Investors are introducing more proprietary products, leading to lower rates and more options for upfront cash and lines of credit, with typical borrowers receiving about 10% more LTV on proprietary loans compared to HECMs.