TORONTO -- With real estate values skyrocketing in many Canadian cities, stock markets in the dumps for years and uncertainty rising over pension payouts, a reverse mortgage seems to make sense for a retiree homeowner looking for extra income.
But despite the ads on TV and the allure of a loan you never have to pay off, a reverse mortgage is the "last card" a senior citizen should play, Vancouver financial adviser David Chalmers said.
"It's not so much that I think it's a bad card to play, I just think it's the last card that should be played," said Mr. Chalmers, with Rogers Group Financial.
Reverse mortgages, introduced in Canada in the mid-1980s and now available across the country to homeowners over age 62, let householders turn home equity into cash without having to sell.
Unlike a regular mortgage, in which the loan decreases as the equity increases, the amount owed on a reverse mortgage increases while the equity decreases.
Repayment isn't usually made until the homeowner dies or moves out of the house. At that point the loan comes due with interest, typically about three percentage points above the prime lending rate.
About 5,500 Canadians have reverse mortgages and the principal amount averages 30 per cent of the appraised value of their homes. The older the applicant, the more equity can be used, with 40 per cent or $500,000 as the maximum.
"What's good about [a reverse mortgage] is that, as they say in their commercials, you get an income for life, you're never forced to move out of your home, you can stay there as long as you want. There's just going to be a big charge against your home when you ultimately do move out or die," Mr. Chalmers said.
"That's fine, but all you have really done is you have converted some of your children's estate into an income for you, which you can also do simply by spending money that you have or by converting money to an annuity."
The latter, Mr. Chalmers pointed out, don't involve new debt. The Canadian Home Income Plan, which administers reverse mortgages, doesn't pretend this financial tool is for everyone.
"There are a variety of different reasons why it might be the right choice but there are a variety of reasons why it might not be the right choice," said Sian Owen, spokeswoman for CHIP.
For instance, Ms. Owen said, a reverse mortgage wouldn't be a good way to finance an expense such as a new roof because a bank could probably provide a loan at a lower interest rate than the reverse mortgage, which is set at 7.5 per cent for this year.
But if staying in one's home is important, the reverse mortgage is worth consideration, she said.
Mr. Chalmers, whose clients are mostly of retirement age, agrees. He has placed only one reverse mortgage in his career, "because it fit like a glove for that particular client," he said.
"If you said to me, 'All I have coming in is Old Age Security, Guaranteed Income Supplement and I have this $700,000 home, but the most important thing to me is to stay in that home,' then I'd say a reverse mortgage is the solution," Mr. Chalmers said.
"But overwhelmingly, when we look at all of the considerations, there are better ways to accomplish the objective."
The Canadian Home Income Plan counsels seniors interested in a reverse mortgage to consult a financial adviser and let their children know what they're planning to do.
Otherwise, heirs to what they thought was a house worth $500,000 could get a surprise.
A reverse mortgage may appeal to a healthy couple in their 70s who imagine living the rest of their lives in their home. But it's not such a pretty proposition when one partner dies and the other wants to move, or if they both have to go into a nursing home.
"At that point it's just a complete shock and people say, 'If it's costing me that much already, it's not worth it for me to move,' " said Alan Hoffman, a financial planner with Boosterlink Solutions in Newmarket, Ont.
Mr. Hoffman has developed a tool to compete with the reverse mortgage by arranging with Toronto-Dominion Bank for his clients to get personal lines of credit worth up to 65 per cent of the value their homes.
The client borrows the full 65 per cent, invests it and pays the loan -- with interest at the prime rate -- from investment income.
Like a reverse mortgage, this entails going into debt, something Mr. Chalmers cautions seniors to avoid if they have other resources.The facts about CHIP and reverse mortgages
Facts about the Canadian Home Income Plan and reverse mortgages
Concept: Enables homeowners to generate income by taking out a loan against their home. Unlike a regular mortgage, repayment usually comes only after the owner dies or the home is sold. Anyone who inherits the house must repay the loan and interest in full.
Conditions: Reverse-mortgage clients must be 62 or older. They can sell, move or repay at any time, but the loan and interest are due if they sell or move.
Cost: Interest is currently 7.5 per cent annually.
Loan amount: From 10 to 40 per cent of home's appraised value. Limit is $500,000. Average applicant gets about 30 per cent.
Ownership: Title remains in the name of the owner. There is no penalty if the property loses value.
Popularity: About 5,500 Canadians have reverse mortgages.
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