IT was suggested that I comment on the “reverse mortgage”, which I’m happy to do. I’ll explain the mechanics first and then give you my know-it-all opinion second. You’ll still only have to pay for the newspaper once.Let’s not assume that we’re all familiar with what a mortgage is. It’s a medium- or long-term loan, usually taken out on the security of a house, although other assets can also be mortgaged. For these purposes, when I refer to a mortgage, it’ll be a house mortgage.

The argument for mortgages is that not many young people have enough money to buy a house, so they put some money down and obtain a mortgage for the rest. Some mortgages run for a limited term, five years or 10, say, and others are linked to the mortgage holder’s working life, i.e. the mortgage runs until the holder’s 65th birthday.

Bermuda has traditionally operated the former kind of mortgage, but is leaning toward the latter, as house prices go through the roof (to use a real estate term).

Equally, banks in Bermuda have learned that young people who would like to be first-time house owners rarely have a 10 percent down-payment, or the chance of accumulating one any time soon. So the 100 percent mortgage was born.

The principle behind a mortgage is that the loan is fully secured by the house. If the borrower fails to make payments, the bank can repossess the house and sell it, covering its lending risk. Any money left over after a forced sale would belong to the former house owner.

Another underlying principle has traditionally applied to mortgages, and that is that the value of the house will increase over the term of the mortgage, enhancing the bank’s warm, fuzzy feeling and developing such emotions in the mortgage holder. What started out as an almost unbearably heavy financial commitment gradually becomes less so as time goes by, the value of the house increases, and inflation eats away at the value of repayments on the mortgage.

That system worked pretty well for 100 years for those who could obtain mortgages. Lately, most Bermuda real estate has risen in value to such an extent that first-time buyers are all but shut out of the market. Yes, you can borrow $700,000 to buy a condo, but not many young people can service that amount when the bills are paid.

Some smart financial brain considered all this, and came up with the idea of what is called the reverse mortgage. Here’s how it works. A Bermudian couple, let’s call them Harry and Sally, bought their home in the 1950s, soon after they were married. They saved up some money, used it as a down-payment, and borrowed the rest from the bank.

Life has been good to Harry and Sally. She stopped working a few years ago, and is a Pink Lady at the Hospital. He retires later this year. Their house is bought and paid for; the mortgage is fully paid back. Other than the house, though, Harry and Sally don’t have much, because most everything else they had went towards raising two kids, whom we’ll call George and Georgette.

George and Georgette are both married and gainfully employed, but they have expensive tastes. Their situation is the reverse of their parents’: they have lots of nice things, but can’t afford to buy houses in Bermuda. George and Georgette are deeply frustrated that their folks are sitting on a million bucks they can’t get their hands on, to help them buy their own homes.

If Harry and Sally were to borrow against the equity in their home, they could give the money to their kids. This would enable George and Georgette to realise their inheritance now, when it would do them some good, rather than later, when it might be too late.

So Harry and Sally take out a mortgage on the home they have already paid for once, and give the money to George and Georgette, who can then buy their own homes. George and Georgette, I’m guessing, would make the reverse mortgage repayments, because they are still working. The reverse mortgage would be repaid if Harry and Sally lived long enough. But, should they die before it’s repaid in full, George and Georgette could sell their parents’ house, pay off any balance, and split what’s left. It makes economic sense.

That’s all there is to it, other than my opinion, which I shall now give you. If you have small children in the house, send them outside to play.

First: the 100 percent mortgage. If there’s a worse financial idea than a 100 percent mortgage, I’ve never heard of it, but we won’t dwell on that. Let’s just say that Bermuda’s bankers must have all fallen victim to some kind of temporary Mad Bankers’ Disease, and move on.

Personally, I find the whole reverse mortgage business morally repellent. In the foregoing scenario, I was George in real life. My parents had a house and I couldn’t afford one. I would no sooner have asked them to go into hock than they would have agreed to do it, had I asked. My parents’ house was their affair, not mine, nor that of my brother Georgette. It was up to us to make it, not up to my parents to hand it to us.

If my Dad had contracted Mad Bankers’ Disease and offered to mortgage his house for me, I would have turned it down. It was his, not mine. It was his one piece of security after a lifetime of denial, and I’m damned if I would have asked him to compromise his security so that his weirdo sons could duck their responsibilities as human beings. What I couldn’t earn, I didn’t want. And so on and so forth — you get the point. Boy, are my children lucky that they were never born.

As I say, there’s nothing wrong with the reverse mortgage idea, if you like that sort of thing. Banks would be delighted to lend to Harry and Sally on such a basis. A company that specialises in reverse mortgages has recently been formed in Bermuda and it will do well.

One final word of warning before I go off to the Frothing At The Mouth Club, where I hang out: if you’re Harry or Sally in this scenario, be absolutely certain that you trust your children. Not now, but once they see the colour of your cash. Because if you think that a child who would make you mortgage your home would be satisfied with half your net worth in his or her pocket, think again.

Kindly address all hate mail to crombie[AT]northrock.bm

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Roger Crombie is a Fellow of the Institute of Chartered Accountants in England and Wales, a Member of the Chartered Management Institute, and a Fellow of the Institute of Financial Accountants.