How a reverse mortgage can help you cash in on your home

Millions of pensioners are living in poverty despite owning an asset worth tens, or hundreds, of thousands of dollars: their home. There is an increasingly popular solution but it won't suit everybody. Here's what you need to know before deciding if a reverse mortgage is right for you.

A reverse mortgage is just like any other home equity loan. You borrow money and your home is used as collateral for the loan.

• The biggest difference is that with a standard home mortgage you must pay back principal with interest over time, whereas with a reverse mortgage you pay neither back until after the property is sold, either after you die or move into a nursing facility.
• This allows you to remain in your home and yet use the equity for other retirement needs.
• You can choose to take the money in a lump sum (buy a new car, take a trip around the world) or installments to create an income stream to help you meet day-to-day expenses.

Canadian banks and other financial institutions don't actually provide these loans. They take a small commission and refer you to the Canadian Home Income Plan (CHIP) Corporation, but you can contact CHIP directly at www.chipcorp.ca and avoid the commission.

• Currently CHIP holds about 6,200 reverse mortgages for seniors.

• How do you qualify?: You must be at least 62 years old and own your home outright. If you have a small existing mortgage, you must use the proceeds of the CHIP loan to pay off the mortgage.
• How much do you get?: The specific amount available to you is based on your home's current appraised value, your age and that of your spouse, and on the location and type of home you own.
• Are there any initial costs?: You will have to pay for an appraisal fee, legal fees and a CHIP closing fee.

You'll pay a higher interest rate for reverse mortgages, but rates are discounted the longer you have the loan.

You pay no income tax on the proceeds from the reverse mortgage, and it will make no difference to your eligibility for Old Age Security (OAS) or Guaranteed Income Assistance (GIA) benefits.

• This makes a CHIP Reverse Mortgage a tax-friendly alternative to taking extra RRIF withdrawals or cashing in non-registered investments.
• Also, if you use the proceeds from your reverse mortgage to purchase new investments, the interest expense of the mortgage may be used to offset tax on the new income.

Be careful:

• If you end up living longer than expected, the principal amount of the loan plus accumulated interest may end up being close to the value of your home.
• With interest compounding (you owe interest on the interest), your debt can double in 10 years and you may end up with too little equity in your home to finance a move should your health require it.

If you live longer than expected and the interest that has accrued (plus the principal amount borrowed) is greater than the value of your home, your estate will not owe any more money than the sale price of the house.

• If the amount owed is less than the value of the house, your estate retains the remaining sale proceeds.

Before deciding if a reverse mortgage is right for you, contact your financial planner or CHIP and unlock your home equity.