Making ends meet on a fixed income is a tough road. My mother is living proof. With little savings, she struggled along on old age security and guaranteed income supplement plus a bit of Canada Pension. What she did have was a house, home ownership being one thing she had always valued.
As I was wondering how her life could be made easier, I was introduced through my bank manager to a retirement planner who talked about a reverse mortgage, taking some equity from my mom’s house and investing it to provide a new income stream.
Available to people age 60 and older, a reverse mortgage takes the form of a loan against the assessed value of the house with no payment required until the homeowner moves out or dies. At that point the loan and accrued interest must be paid.
There are diverse opinions on the subject. Friends warned Mom of hidden dangers. She worried about eroding the inheritance she hoped to leave to her children.  Maverick politician Garth Turner was once quoted to have mischievously said, a reverse mortgage "is an ideal strategy if you hate your children."
I had questions. Would the money affect her pension supplement, trading one form of income for another? No, since it is a debt rather than income.
There are other cautions. The Financial Consumer Agency of Canada (FCAC), established in 2001 by the federal government to protect and inform consumers, lists possible disadvantages:
o a higher interest rate than for a traditional mortgage or line of credit
o fees such as for home appraisal, closing  and legal costs.
One of the biggest red flags waved by consumer advocates is the warning that the equity in the home will be quickly depleted as the interest builds up.
Says the FCAC, "Since the principal and interest will be repaid upon death, there will be less, for estate purposes, to leave to your children or other heirs."
Reverse-mortgage providers don’t deny that fact.
"Compounding interest, in a saving mode, works to your advantage but in a debt mode, works to your disadvantage without a doubt," says Greg Bandler, senior vice president, marketing and sales with the Canadian Home Income Plan (CHIP), Canada’s oldest provider of these mortgages and until recently the only one nationally.
However, Bandler says it’s important to take into account the mitigating effect of the home’s appreciation. The 20-year average appreciation of Canadian home values, according to the Canadian Real Estate Association, is 5.6 per cent per year.
"So you’ve got that offsetting the compounding interest," Bandler says. "In the 20 years we’ve been in business, 99 per cent of all clients have had at least 50 per cent of the equity remaining in their home at the end of the program."
The ideal scenario, then, is when housing values are steadily appreciating. If Canadian homes were to face falling values, as has happened in the U.S. in the past year, reverse mortgages would make less sense.
Nick DiRenzo, president and CEO of Seniors Money Canada, the new kid on the block, moving into the Canadian marketplace last August, offers a typical scenario: "If you had a $200,000 home and took 25 per cent, or $50,000, the interest rate being seven per cent and the house growing at a conservative two to three per cent, after 12 years the house may grow to be worth $250,000 but the loan will have grown to $125,000. The difference is 50 per cent of the market value at the time of the sale."
DiRenzo points out that the providers guarantee that the amount to be paid back will never exceed the market value of the home at the time of sale. It’s why the loan to value ratios are low.
Typically, loans start at 10 to 15 per cent of the assessed value for people in their 60s, at the younger age end of the scale when the loan is likely to be in place longer, and go up to 40 or 45 per cent at the upper end.
DiRenzo says potential borrowers should ensure they understand the terms and implications and are comfortable with the numbers.
"There’s nothing hidden in any of this. We disclose everything the customer needs to know, make sure they’ve thought about what their needs are and that it’s an appropriate way to finance those."
In the end, it worked well for my mother, who now has money left at the end of the month and is not dipping into her meagre savings. And, at the end of the day, there should be some equity left in the house and the principal of the loan sitting in an investment portfolio. Do I begrudge Mom borrowing against what could be considered my inheritance? Not for a second!