Reverse Mortgages : Folly or Fortune?

Reverse mortgages are growing in popularity alongside the number of retirees in Canada but are they really a good idea?

According to HomEquity Bank, the only national provider of reverse mortgages in Canada for those 55 and older, as of the end of 2014 the portfolio of reversed mortgages had exceeded $1.7 billion.

Seniors, living on a fixed income, may be happy in their own home but would like a better cash flow. The idea of a reverse mortgage, which allows access of up to 50 per cent of your home’s value, may be tempting to seniors who may not have saved enough for a lengthy retirement.

Reverse mortgages allow older home-owners to access equity without making mortgage payments or paying off the interest or principal until the home is sold or the owner dies.

Lending rates are generally set above market and compound semi-annually so the debt could potentially doubt every 7 years, according to a June 2013 report in the Globe and Mail.  Before long, much of the equity in your home has been eaten away, leaving less money in the estate.

Other options to cash flow problems among seniors include a secured line of credit at a much lower interest rate, or downsizing to a less expensive home.  The second option would free up cash to invest in an annuity or other security that will pay an income.   Renting could also be an option in some cases.