You've seen the ads and now you may be wondering: Should you top up your RRSP by taking out a reverse mortgage?
Introduced in Canada in 1986, a reverse mortgage lets homeowners aged 62 and over borrow against the equity of their home.
Unlike other types of loans, a reverse mortgage doesn't have to be repaid until the loan comes to term, or when the homeowner dies or sells the house. Interest on the mortgage would also be payable at this time, although a homeowner could choose to pay it annually.
More than 5,800 Canadians have reverse mortgages, secured by about $1.2-billion in real estate.
Depending on their age and gender, older homeowners can borrow 10 to 40 per cent of the appraised value of their home, to a maximum of $500,000.
Sian Owen, vice-president of marketing for the Canadian Home Income Plan (CHIP), which provides reverse mortgages, points out the advantages: tax deductions that can be taken now or spread out over several years, a payment plan that doesn't have an impact on your monthly budget and, of course, more money in your RRSP earning compounding interest.
But she acknowledges that the strategy may not be good for everyone. People with low incomes, for instance, may not be good candidates.
"The main caveat is whether the RRSP tax deduction is going to be meaningful enough to make it worth doing this," says Ms. Owen. "The lower your income, the more carefully you need to review this option with your financial adviser."
Lenore Davis, a registered financial planner with Dixon, Davis & Co. in Victoria, B.C., says using a reverse mortgage to fund an RRSP is not a strategy she would recommend.
"My first reaction is you're borrowing money to put into an RRSP, so the interest cost of borrowing money is not tax-deductible," she says. "It's really just another way of taking a loan to put into an RRSP."
In general, Ms. Davis says, she doesn't believe in borrowing money for an RRSP unless the loan can be paid off within a year.
But if you do want to go this route and a house is the only asset you have, then she recommends a home equity loan or a line of credit, which usually offer lower interest rates than a reverse mortgage.
"The typical argument in favour of a reverse mortgage is that the principal doesn't have to be paid until death," Ms. Davis says.
"Well, you can do that with a home equity loan. You can arrange a line of credit where you service the interest as you go but don't have to pay the principal."
While financial author Gordon Pape is a spokesperson for CHIP, he says the RRSP route is "not my favourite way of using a reverse mortgage. It's only the optimum approach in specific cases."
As an example, Mr. Pape looks at a lawyer a few years shy of retirement who is earning $150,000 a year. After retirement, the lawyer's income will fall to around $75,000 yearly.
In this hypothetical situation, says Mr. Pape, it may be a good idea for the lawyer to take out a reverse mortgage today, while he's still earning top dollar, and plunk the money into an RRSP.
"Then you can maximize your tax deductibility and get this big tax break right now. But you have to have a lot of carry-forward room."
Mr. Pape says his preferred approach is to put money from a reverse mortgage into a non-registered investment. This way, the interest costs from the mortgage can be claimed as a tax deduction.
For some financial advisers, using a reverse mortgage to top up an RRSP is never a good idea.
Cherith Cayford of Camelot Management Group Inc. in Qualicum Beach, B.C., falls into this camp.
"I would certainly never recommend it," she says. "Reverse mortgages are expensive -- they eat up home equity and there comes a time in people's lives when maybe they need to give up their family home for health reasons or to move into lower-cost housing.
"They'll lose that flexibility with a reverse mortgage, and they'll almost be a prisoner in their home," she says.
Ms. Cayford also cautions that a higher balance in your RRSP could result in clawbacks on your Old Age Security and make you ineligible for a guaranteed income supplement, a top-up income for low-income seniors.
Howard Kabot, manager of wealth planning services for Bank of Nova Scotia, a CHIP partner, says a reverse mortgage should be the last option to consider for financing an RRSP.
Instead, he recommends drawing from more traditional sources, such as cash, stocks, bonds or an RRSP loan.
For those who don't have these options available to them and are considering financing their RRSP through a reverse mortgage, Mr. Kabot has this advice:
"You're taking out equity in your home and you have to measure the benefits of that -- or the disadvantages -- versus making the RRSP contribution," he says.
"And for those people who wish to leave an estate, a reverse mortgage will give them less opportunity to do so."
© The Globe and Mail
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