Nothing reduces future inheritance and spending ability like mortgaging to spend now. A decade of low-interest rates has taken a compounding toll in the form of falling investment income for savers along with leaping shelter and education costs. This has prompted seniors to borrow against their home ‘ATM’ to live (via regular and reverse mortgages) and also to help their kids and grandkids buy into unaffordable property markets and an accompanying life of debt-servitude. See Seniors and their growing mortgages are wrecking the good-news-story on Canada getting its act together on debt:
TransUnion report also tells a worrying story about debt growth among seniors: The volume of new mortgages set up by what TransUnion calls the “silent/pre-war generation” (between the ages of 73 to 93) surged by 63 per cent on a year-over-year basis in the most recent quarterly data.
…“I’m telling you, there’s a lot of worried people,” [Terrio] said. “They’re taking the home equity they’ve built up over the years and now they’re turning it back into debt because they’re helping their adult children. A lot of it is home down payments.”
…While the number of new mortgages for seniors jumped 63 per cent in the first quarter on a year-over-year basis, mortgage volumes rose 18 per cent for boomers and fell roughly 20 per cent for young adults.
Thomas Stanley and William Panko’s illuminating book The Millionaire Next Door (1998) includes real-life intergenerational studies looking at when it tends to be beneficial to loan or advance funds to adult children, what the authors call “economic outpatient care.” It turns out that helping children to buy homes they can barely afford can be giving them a life sentence of frustration and financial strain trying to “keep up” with neighborhood consumption patterns. Loaning and borrowing or gifting to help one fund personal consumption is usually not financially constructive in the end.
A better idea in many cases is not to pile on the debt in order to help kids ‘buy high’ but rather to move to lower cost areas, or for the family to do things as a unit that helps them lower costs and increase cash savings for future down payment, education and retirement needs. Sometimes this may be generations sharing one property for a time as many immigrants have traditionally done both in their countries of origin and once in North America. Separate apartments in one home can be a highly efficient way to do this while still maintaining privacy and independence. Other times renting while one builds savings is far smarter than buying with all the maintenance and related costs it brings on top of the mortgage. The bottom line is that teaching and helping people to live with minimal debt, especially for personal consumption items, is one of the best gifts anyone can give.
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