Over the past 25 years, a seismic shift in how people think about retirement has occurred. A steady decline in interest rates to historically low levels combined with pressure on defined-benefit pension plans means many retirement strategies now hinge on the appreciation of real estate assets.

Accepted as not just a place of shelter but a forced savings plan, the primary residence has become a key source of equity for many families. Cash-strapped families in all age groups often see the accumulated equity as a reserve against financial pressures, with approximately a third of Canadians extracting equity when the time comes to renew their mortgages.

Real estate marketer Rennie Marketing Systems estimates the volume of clear-title real estate in the Lower Mainland at $197 billion, with more than a third of that equity in the hands of people aged 55 years and older. This gives many longtime homeowners – now seniors – a large reserve of equity, says Yvonne Ziomecki, senior vice-president, marketing and sales, with Toronto-based HomEquity Bank.

Rather than sell their homes to access the equity, many homeowners opt for a reverse mortgage in which they receive equity and charged interest for the duration of the term. Reverse mortgages allow seniors to access up to 55% of the value of their principal residence, providing a key way to tap into home equity for those who aren’t ready to downsize.

“People want to enjoy their retirement years in their homes, in the surroundings and the neighbourhoods they are comfortable with,” Ziomecki says. “For a lot of them, if you bought your house for $30,000 however many years ago and now it’s worth $1.3 million, and someone can give you an advance on your equity of $100,000 or $200,000, it can be life-changing.”

HomEquity offers the CHIP reverse mortgage as well as Income Advantage, a flexible product that allows intermittent withdrawals of equity from as little as $500 a month to $25,000 a month.

HomEquity, a Schedule 1 bank established to serve demand for reverse mortgages, said disbursements in 2016 will total approximately $500 billion, a 30 per cent increase from 2015. This is among the biggest year-over-year leaps the company has seen. Typically, its business grows about 20% a year.

Tracing its origins to Canadian Home Income Plan Corp. (CHIP), a reverse-mortgage provider founded in 1987 in Vancouver, HomEquity now manages a national portfolio worth $2.2 billion. Approximately a third of its business is in BC, thanks in part to good awareness of reverse mortgages as well as strong home values.

“The growing popularity has really been interesting,” Ziomecki says. “It supports the demographic trends you’re seeing with respect to seniors – more debt, less pensions, less savings.”

Statistics Canada reports that the debts of BC households aged 55 years and older increased 238% between 1999 and 2012. Total assets rose just 162%, driven by a tripling in the value of principal residences.

Ziomecki says the loans are typically taken for one of four reasons: to pay off debts, to cover unexpected expenses, or to maintain or augment a given style of life.

A reverse mortgage is attractive versus a registered retirement savings plan or a registered retirement income fund because the cash is tax-free, whereas additional income from the tax-sheltered funds would have tax owing. A regular mortgage or private loans are alternatives but interest rates tend to be higher.

HomEquity’s current interest rate is 4.99 per cent, competitive with many home equity lines of credit and – for those seeking to cover debts – attractive compared to the 19.99% rate credit card companies charge.

Repayment of the mortgage doesn’t occur until the property ceases to become the mortgagee’s primary residence, through death, illness or the sale of the property. HomEquity allows 12 months for repayment when occupancy ends, and in the rare event a property’s sale doesn’t cover the advance, it forgives the shortfall.

Reporting on reverse mortgages, DBRS Ltd. notes that lenders such as HomEquity pay scant attention to the credit quality of the client since the repayment depends on the property mortgaged.

However, this doesn’t mean a reverse mortgage is entirely hassle-free.

Recipients, or their estates, are responsible for maintaining the property in good condition, and overseeing  its sale. Any failure to maintain the property and otherwise protect the lender’s interest could be grounds for default.

Ziomecki says some reverse-mortgage holders have been clients for years, without issue.

“We have clients on the books from 1992,” she says. “They got their reverse mortgage advance then, and they’re still living in the house.”

Retirement Ready : Reverse Mortgages – Are They for You? by Peter Mitham | Business in Vancouver