Cash strapped retirees pile into reverse mortgages: report

It’s not uncommon for many retirees to take out small loans against their home equity to fund renovations or even to make down payments on an additional property.

More and more, however, older homeowners are finding they need to squeeze a bit more income out of their house. That’s leading to record number of reverse mortgages in Canada, according to a recent HomEquity Bank study.

Reverse mortgages are offered to Canadian homeowners 55 and older and have no income, credit or health hurdles to cross. As well, unlike traditional loans, borrowers don’t have to service the interest or repay the principal for as long as they own their home and are still living in it.

Business seems to strong. HomEquity, the only national provider of reverse mortgages in Canada, says its reverse mortgage business was up 42% in the fourth quarter of 2011. On an annual basis, the company wrote $239 million in reverse mortgages, a 16% year-over-year jump that lifted its portfolio of reverse mortgages to $1.2 billion.

Sure seems like an expensive way to fund your retirement. The amount you owe increases over time, while the amount of equity in your home decreases. What’s worse, the younger you are, the more the compound interest will grow, and the more you’ll owe.

Right now, HomEquity is charging 4.75% on a variable-rate mortgage which is 1.75 percentage points above prime. Five-year terms are available at 5.95%. That compares with rates as low as 3% for more conventional five-year mortgages.

A good deal? A necessary evil in a low-rate environment? Do you see a reverse mortgage in your future?

By Gordon Powers, MSN Money

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