When Ron Kerr retired, he thought he had it figured out. He'd spend summer days on the golf course. Take trips to Florida in the winter with his wife, Lyn. Maybe buy a new car.

But then the reality of retirement without company pensions set in.

"General living expenses kept going up and up - to the point where we couldn't do the things we wanted to do," he recalls of those early retirement years, when family income was under $35,000.

The Kerrs owned their modest home on Dempsey Avenue in Ottawa mortgage-free. But maintenance costs were piling up. The old oil furnace was expensive. And with the price of everything else on the rise, the family budget was being gobbled up by day-to-day living expenses. The golfing and travel dream was quickly evaporating.

When Mr. Kerr saw the ads for a financial product known as a reverse mortgage, he believed it was the answer to his budget crunch. With a reverse mortgage, he could unlock a sizable chunk of value he had built up in his house since 1961 and turn it into cash.

And so, in 2002, after mulling it over for two years, he did what thousands of other seniors have done since the Canadian Home Income Plan Corporation (CHIP) opened its doors in Canada in 1986: He used his house as a bank and made a withdrawal.

Mr. Kerr, who had worked in the typesetting department of the Ottawa Journal for 27 years, was 68 years old when he hired a lawyer and signed the paperwork that would give him $35,000 in cash ($33,715 after closing and administration fees were deducted, and he had paid $1,413.15 in lawyer fees out of his pocket) to do with as he pleased.

"The money came in very handy," recalls Mr. Kerr, who said he bought a car with the cash, putting the rest in the bank so the couple could breathe a little easier. Take a trip. And pay for green fees.

A reverse mortgage, for those who haven't seen the ads, is a seniors-only loan secured by the equity in your home. To qualify for the plan offered by CHIP, the leading provider of reverse mortgages in Canada, you must be at least 60 years old. The attraction is that the money can be used for anything the homeowner desires - without making a single monthly payment. The loan and accumulated interest do not have to be repaid until the house is sold or the homeowners die.

The downside is that, as Mr. Kerr found out, reverse mortgages come at a price. It was when the senior inherited a bit of money from his sister's estate that the full cost of the loan hit home. These days, Mr. Kerr, now 74, sees a reverse mortgage as a last resort.

"You'd have to be desperate," he says, pointing out what the paperwork told him, but what he didn't fully grasp until he wanted to get out of the reverse mortgage: there's no free money.

That $35,000 he borrowed cost $42,000 to pay back. "It cost $7,000 in less than two years," he marvels, referring to the combination of high, compound interest rates and penalties for premature repayment. "My advice is to check the rates very carefully."

Still, Mr. Kerr admits that when he got the loan, he considered it a good investment. What he has since learned is that he should have looked at other options to see if a reverse mortgage was right for him.

"I just looked at getting the money," he says.

Google "reverse mortgage" and you will find plenty of information. Also known as home equity conversion mortgages, these financial products have been wildly popular in the United States for years. And while they are now becoming more attractive to younger boomers in Canada - CHIP to date has underwritten more than 15,000 reverse mortgages -they still carry a stigma here.

And that, says P.J. Wade, author of the wildly successful guidebook Have Your Home and Money Too - a third edition will be out soon - is a shame, because reverse mortgages, in the right hands, can make life better.

"They can be your best friends, or your worst enemies," she says.

Gone are the days, Ms. Wade says, when seniors scrimp and save in their retirement years so they can pass on their wealth to their children after they die.

"You're accumulating wealth so you can use it," she says, pointing out that for the majority of people, real estate represents more than 60 per cent of their wealth. For others, it's as high as 90 per cent.

"With life extending, living independently in the home is what we aspire to," she says.

One way of accomplishing that goal is to use your house as a bank.

"A reverse mortgage is your friend," Ms. Wade says, "if the home you love is in a good neighbourhood you don't want to leave, you've built up a lot of equity in that home and you've looked at all the options and found them lacking."

The key, she says, is to make sound financial decisions that consider all possibilities. For example, what would happen if you need more care down the road, or if you need to move. Will there be enough money for a nursing home? And what happens if the real estate market falters and your home equity is used up before you die?
"These are solid, sensible decisions that are not typical for most consumers," says Ms. Wade, who said she is shocked when she hears about people who have worked all their lives, but have done little research into how they will manage their finances.

For these people, she says, a reverse mortgage can be an enemy, especially if they have no savings, and don't use part of the cash to create more money through investments. If they take too much out too soon, they could be left with nothing.

"A reverse mortgage is not a product to consider if they want someone to babysit them for the rest of their lives," says Ms. Wade, who offers tips on reverse mortgages on her website at www.thecatalyst.com.

Greg Bandler, CHIP's senior vice-president of sales and marketing, says the typical senior who takes out a reverse mortgage is 70 years of age and "financially savvy." He says his company goes to great lengths to explain the ins and outs of reverse mortgages directly with clients, as well as through its agents and partners in banks and other financial institutions.

"CHIP insists on independent legal advice," he says. "And we do encourage people to discuss things with financial advisers and family members."

As for the risks, Mr. Bandler says CHIP guarantees, through its "conservative" lending practices, that the amount owing on the mortgage will not outstrip the value of your home. In more than 20 years in business, he says, that has only happened three times.

According to CHIP, seniors most often use the cash from their reverse mortgage loans to make new investments, eliminate debt, make home improvements and help their children and grandchildren.

"They have the opportunity to enjoy seeing them go to university," he says.

Giving her grandchildren a home and a future prompted 74-year-old Pat Hobbs to take out a reverse mortgage of about $100,000 on her Kanata residence late last year. A widow for 27 years, she found her budget stretched to the limit when her young granddaughters, now ages seven and 10, and their father came to live with her four years ago after a divorce.

"When I die, of course that loan has to be paid off," says Ms. Hobbs, who asked that her maiden name be used for this story because she doesn't want her friends to know she is house-rich, but cash-poor. "Then my son will get the house - he can take out a small mortgage on it - and the girls will have a home. That's the main thing."

Ms. Wade, who sees home equity conversion as "our future," wonders why the concept is limited to seniors. She sees a day when non-profit organizations, and credit unions backed by members, step up to offer their own equity lending programs that will help keep people in their homes, strengthening communities.

"We will see consumers thinking like developers, thinking like lenders," she predicts, adding that developers could build reverse mortgage opportunities into their housing projects, allowing homeowners of all ages, with enough built-up equity, to turn that value into cash. In return, people will be able to stay in their homes longer, keeping communities strong and healthy.

"This is the wave of the future," she says. "Consumers can decide who will be the boss of their futures: themselves, or a big corporation."

Published in The Ottawa Citizen on Jan. 26, 2008
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