By Chris Stephenson

Tom has a thing for Principal Protected Notes. He thinks that most PPN’s don’t benefit investors. I feel the same way about another product, the reverse mortgage.

Reverse mortgages are a product targeted towards seniors who are house rich but cash poor. Instead of clipping coupons and eating beans, those over 60 can get money out of their homes and live out their dreams, so the pitch goes.

The notion of using one’s home as an ATM machine is nothing new. Banks have long trumpeted using home equity loans for every kind of purpose imaginable. As a former bank employee, I’ve seen it first-hand. What’s more, the banks will typically offer these loans at a borrowing rate of roughly 2% less than ‘reverse mortgage’ providers. So why do seniors need so-called ‘reverse mortgages?’

Beats me.

According to the product providers, Canadian Home Income Plan (CHIP) and a recent entrant, Seniors Money International (Jonathan Chevreau talks about these players in his column in last weekend’s Financial Post), it’s because seniors with little income often fail to qualify for bank loans.

Last time I checked, it wasn't hard to find bankers willing to offer loans of up to 40% of the value of one’s principal residence to homeowners with limited income, especially considering these bankers can then advise on investment solutions after advancing the loan (along with collecting a nice fee for setting up the loan, of course).

Why the banks are letting these reverse mortgage providers carve out a market for themselves, rather than marketing their own solutions more aggressively, is beyond me. But my burning question is why would someone opt for a ‘reverse mortgage’ when they can easily make an arrangement with their friendly banker that has more favourable terms? While reverse mortgages offer some nice features, their costs far outweigh their benefits in my opinion.

I guess some people just don’t fully explore their options. Which would also explain the popularity of PPNs.