Some see merit in reverse mortgages

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A record number of reverse mortgages in Canada has sparked concern, with some in the financial industry expressing fears of homelessness. However, the more pragmatic in the industry are quick to offer reassurance that it’s not all gloom and doom.

“When you first read the report, it’s a little alarming,” says Laura Parsons, a BMO mortgage specialist. “[It suggests] we’re destitute and haven’t planned for our retirement at all, but there are lots of reasons why people take equity out of their home.”

Among the more responsible reasons are home renovations/repair, or paying increasing medical bills, she says. Of course, seniors could be using the money to fund vacations.

That said, seniors considering a reverse mortgage should consider all available options, she adds. A financial advisor plays a crucial role in helping retirees understand various options and their financial impositions.

They can do so by laying it out for their clients very clearly the cost of each product and its impact on their budget and home equity, says Parsons. “Everything’s a fit, and you choose the right thing for yourself in the end.”

Detractors of reverse mortgages argue that they saddled seniors with huge fees, uncompetitive interest rates and that they lack flexibility.

Curt Hanselmann, a financial advisor in Calgary, asserts “a conventional re-mortgage will work much better [than a reverse mortgage] for those seniors.”

Bryan Yu, economist, Central 1 Credit Union, feels advisors can play a significant role in helping their clients navigate through various retirement tools to generate cash flow without having to face undesirable consequences.

“Changing demographics mean changing financial services,” he says. “It’s a question of education; reverse mortgages may not be for everybody, so retirees need to understand what type of products are available. The role of an advisor in that scenario is looking at all the alternatives in terms of how [retirees] can finance their retirement.”

As a trend, retirement tools such as reverse mortgage will grow in popularity, he adds, as seniors seek an alternative to downsizing their abode.

“They might want to stay within the own home and a reverse mortgage provides them another tool that allows them to stay in place, but also obtain an income flow from that asset without selling it.”

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HomEquity Bank, the only national provider of reverse mortgages in Canada, recently released a study that noted its reverse mortgage originations were up 42% in Q4 2011. On an annual basis, 2011 saw $239 million in reverse mortgages, a 16% year over year jump. As at December 31, 2011, the bank’s portfolio of reverse mortgages of $1.2 billion was 17% higher than at December 31, 2010.