CBC MARKETPLACE: YOUR HOME » MORTGAGES
'Reverse mortgages' explained
Broadcast: April 11, 2000

The television ad promises fast cash and no monthly payments. And to elderly Canadians whose only asset is their house, it seems a good idea. But a reverse mortgage may cost you a fortune.

Meet Sylvia Welowszky. At 69, she feels she's in the prime of her life. Her main asset is a three-bedroom house in the west end of Toronto.

After 42 years of marriage, she's separated from her husband. In the separation, her husband got the money and she got the house, which was paid off. So she's house-rich but cash-poor.

"I have a very low pension because I'm single," says Welowszky. "And I have a house to upkeep and I needed to do repairs on the house. I needed to pay off debts because I had been repairing the house."

Welowszky's solution was to get a reverse mortgage on her house.

She qualifies because she's over 62 years old. She got $46,000, and she won't have to repay a penny for years -- so long as she lives in her house.

Sylvia is not alone. The average Canadian senior has 80% of their assets tied up in their house. But for those with little or no income that can be a real problem. Typically they can't borrow on their house because they have no income to make monthly payments.

With a reverse mortgage you get a lump sum and make no monthly payments. But the principal remains unpaid and interest accumulates. The debt is repaid only when you sell your house or you die.

P.J. Wade is a financial planner and an expert on reverse mortgages. She wrote a book on them, called Have Your Home and Money Too.

"Well, a reverse mortgage is a way to have your home and money too," Wade says. "It's a way to tap into the equity you've accumulated in your home and have cash, a lump sum, a stream of income and still be the owner of your home -- to live where you want to live without the worry of repayment until sometime in the future."

Sylvia Welowszky says she thinks it's a wonderful plan.

"I'm enthusiastic about it. I don't jump into things that I don't find out about. And I'm very pleased with it."

She was so pleased she agreed to appear in a TV commercial for reverse mortgages - part of the first national advertising campaign to market the product to Canadians. And she's been speaking to friends, like Hansa Chauhan, about them.

But unlike Sylvia, Hansa Chauhan is only 50. She was told she and her husband could get a reverse mortgage because he's almost 62. And they'll put the house in his name.

"We'd like to do some travelling, buy a car and maybe another house," Chauhan says.

But here's the rub. Because of her age, if she takes out a reverse mortgage now, she'll still be relatively young when the equity in her house is gone.

For example, if she took out a $50,000 reverse mortgage now at the present rate of 10%, she'll owe $100,000 seven years from now. And in 14 years the original loan will quadruple to $200,000.

Chauhan would be just 64 and most of the value of her house would be owing to the mortgage company. All in all, it's not a great deal.

"A reverse mortgage can be your best friend or your worst enemy," says author Wade. "It can be your worst enemy because it can eat up the equity that you've accumulated in your home over many years in just a few years."

But at least the reverse mortgage company can't foreclose, no matter how large your debt - even if it's greater than the value of the house.

MORE: Is a reverse mortgage right for you? »

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