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By Ruth Saldanha |

Reverse mortgages should be a last resort

Investors should look for lower cost borrowing options, as reverse mortgages could have interest rates as high as 7%, says certified financial planner Jason Heath

Ruth Saldanha: With the growth of reverse mortgages on the rise in Canada we decided to take a closer look at the product. What kind of investor should consider reverse mortgages and what does it mean to an overall financial plan? Certified Financial Planner Jason Heath of Objective Financial Partners is here with us today to discuss this. Jason thanks so much for joining us.

Jason Heath : Thanks Ruth. Thanks for having me.

Saldanha : What has led to this growth in reverse mortgages.

Heath : I think it's just a case of real estate prices have been on such a steep incline for a number of years. There is a lot of people that are approaching and are already into the retirement phase. And some of those people have some or even all of their net worth tied up in real estate. So the choice for senior maybe to sell a property and downsize it buy something cheaper, sell and rent and neither of those options is appealing to some people. So borrowing against your home equity is an option. Home equity lines of creditor are one consideration or one possible avenue, but not everybody can qualify for home equity line of credits. So reverse mortgages have become a much more common and popular product and I suspect that’s going to continue.

Saldanha : For whom do reverse mortgages make sense?

Heath : Well I would say that it should be probably be a last resort for most people, and what I mean by that is if you do have savings usually it's better to draw down on those first. I would tend to opt for a home equity line of credit over a reverse mortgage if you are trying to access equity in your home. It's a little bit more flexible the interest rate tends to be a fair bit cheaper. Home equity line of credit you might pay a 4% interest rate on right now for example or as a reverse mortgage it might be 7% interest. But if somebody is retired and they don’t have an income. They may not be able to qualify for a home equity line of credit. A reverse mortgage in that instance maybe the last resort other than selling the property for example.

Saldanha : With home prices being so high and stock markets being so volatile. Is there a case to be made for some investors to kind of access a line of home equity as opposed to selling their equity investments right now?

Heath : That’s good question. I've seen it suggested by some people as far as one of the options for drawing down your retirement assets. I mean accessing home equity instead of stocks in a down market. I think for most people it's not appropriate, I mean ultimately what you are trying to do in a situation like that is time the market. Try not to sell when stocks are low and it's also a leveraging decision you are making the choice to effectively borrow to invest even though you are not borrowing directly to invest. I think that can be really difficult for a lot of investors, but particularly for the type of people who would be using a reverse mortgage. Typically it's going to be a retiree somebody in their 60s, 70s or maybe even their 80s to be borrowing to invest or taking on debt I think can be a really risky proposition.

Saldanha : Thank you so much for joining us Jason.

Heath : Thanks for having me.

Saldanha : From Morningstar I'm Ruth Saldanha.

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