There are several ways to tap into home equity to help fund your retirement.  A Reverse Mortgage may not be one of them as the cost of tapping into home equity can be high. 

The Canadian Home Income Plan, the only lifetime reverse mortgage supplier in Canada, is currently charging interest of 7.5 per cent. A reverse mortgage works like this: A financial institution loans you money against the equity you hold in your home. When the loan comes to term, you die or you otherwise sell your home, you have to repay that loan with interest.

CHIP has 5,600 reverse mortgages racking up interest across Canada. At today's rate, the average loan of $65,000 will balloon to a debt of $93,928 after five years, $135,730 after 10 years, $196,137 after 15 years and $283,425 after 20 years. And interest rates won't stay this low indefinitely.

The average borrower repays CHIP at the end of 12 years and keeps only 50 per cent of the home's sale price. When this occurs, other housing options may be limited.

The least expensive source of equity income for house-rich but cash-poor seniors is to defer their property taxes but that likely won't free up enough cash to allow them to travel or pursue other dreams.

It may be better to set up a line of credit against the home, before you retire.  That way you are only drawing what you really need, you are not incurring any more debt against the asset than needed, and the interest rate will be much lower.

The reverse-mortgage concept is usually sold on the idea of getting access to capital locked up in the home. but the problem is that seniors borrow a big lump sum and then buy an annuity, but the annuity interest rate may be, say, 4.5 per cent and the mortgage interest that builds up on the thing is at nine or 10 per cent at times, so the spread between the two is horrific."

The interest rate on CHIP's reverse mortgage accrues semi-annually at a rate set each year at 4.75 per cent above the one-year treasury bill rate.  If interest rates go up and CHIP borrowers find themselves paying a more typical 10 per cent, the cost of the average $65,000 loan balloons to $105,878 after five years, $172,464 after 10 years, $280,926 after 15 years, and $457,599 after 20 years.

A reverse mortgage credit line may be better. It comes with a fixed interest rate equivalent to the posted five-year open mortgage rate and is not discountable. After five years it can be renewed for another five years at the prevailing five-year open term mortgage rate.

Unlike CHIP's reverse mortgage, amounts are advanced only as required and repayments can be made at any time without penalty.  Of course this means more control over your own finances.  Unlike a reverse mortgage, a reverse mortgage credit line must be repaid at the earliest of 15 years or when the loan-to-value ratio hits 65 per cent. CHIP's reverse mortgage is not due until the property is sold or the borrower(s) passes away.  

For more information see this article in .

Some credit unions, such as VanCity in Vancouver have implemented this plan.  However they restrict the use of the funds and takes a more paternalistic approach centred on advice giving.    For example, VanCity's product is not considered suitable for payment of basic living expenses, lending or gifting of money to others, or financing a business venture or regular investment.