When I agreed to write this monthly article, I told the Editor that I would, from time to time, be likely to alienate some vested interests, by commenting on issues as I see them, rather than as others might like to sell them to the public. This may be the first, but probably not the last, of such articles.

A very large proportion of seniors live on our Peninsula, many with paid-off mortgages, but with a modest income stream. For some years now, some of these residents have been tempted by irresistible-sounding advertisements, offering what is known as a reverse mortgage.

While I do not intend to provide readers with specific financial advice, I do hope to provide objective comments, which should encourage them to visit all sides of an issue before making their own, better-informed decision.

On the subject of these well-advertised reverse mortgages, seniors would be well-advised to think very carefully before taking the plunge.

The essence of the sales pitch from two companies offering this product in Canada is essentially as follows: If you are over 60 years of age and your home is mortgage-free, you can: Borrow up to 45 per cent of the home’s value now; Enhance your retirement income with the proceeds, or help your children; Make no payments ever; Repay your loan only when your home is eventually sold; Owe nothing that exceeds the value of your home; Decide yourself when you wish to sell the home.

Sounds great, until you do a reality check!

If you fall for it, here is what this sales pitch translates into:

• You will be charged a set-up and appraisal fee, which together will total $1,500 to $2,000. This will be subtracted from the actual cash you receive.

• You will be charged a compounding rate of interest of between eight per cent and 10 per cent, which will quickly cause the amount you owe the lender, to skyrocket.

• In spite of increasing home values over time, the equity remaining in your home at the time you sell and pay off the loan, will be drastically reduced. This significantly lowers your net worth, and the amount of your children’s eventual inheritance.

Let’s look at an example:

Assume you are 65 years old. You decide to take out a $100,000 reverse mortgage against your mortgage-free home, which is presently valued at $400,000. You expect to be in your home until you are at least 80 years old.

What will your situation look like, after those 15 years go by, and you then sell your home? Let’s assume that your home value increases by three per cent annually, and that the interest rate on your loan is eight per cent.

At age 80, when you sell, your home will be worth $623,000; your outstanding loan will be about $317,000; your net proceeds will be approximately $306,000, less than half of your home’s value!

If the interest rate charged were 10 per cent, rather than the 8 per cent used in the above example, your loan obligation would have grown to $418,000, and your net proceeds on selling at age 80 would have shrunk to $205,000.

If you have no heirs, this loss of net worth may matter little; however, for most of us, it does matter.

Is there a better way, if you really do need $100,000 to improve your retirement lifestyle, or to help your children? There are a number of options to consider. Among them are the following: If you are 55 years of age or older, and have at least 25 per cent equity in your home, the BC Government allows you to defer your property taxes until such time as you or your estate sell your home. A very low interest rate is charged, currently around four per cent, with no compounding of interest owing. Choosing this deferment option will increase your available cash by an amount equivalent to your property taxes, with minimal or no reduction in your home equity.

Consider the possibility of relocating from your $400,000 home to a $300,000 unit. You will have your desired $100,000 cash difference, and still own a mortgage-free home.

Reverse mortgages may have a place in a few select circumstances. Obviously, the older you are, the less equity erosion occurs, but it can still be substantial.

Be very cautious before acting on the reverse mortgage sales pitch. There may well be a better solution that works to your and your heirs’ advantage.

Discuss your specific situation with an independent financial advisor, your banker, and perhaps your children. You may be surprised at how many creative alternatives exist, which preserve your net worth far better, than taking out a reverse mortgage.

Your comments and questions are welcome.Write to editor@peninsulanewsreview.com

Peter Dolezal is a semi-retired corporate executive, living in Sidney. He founded and for five years, ran a real estate company in Vancouver. His best-selling book, The Naked Homeowner, is now in local bookstores.