One-third of Cana-dians’ $5.6 trillion in assets is tied up in principal residences, according to Statistics Canada’s 2005 survey of financial security. Especially in times of strong real estate prices, your retired clients may look at their homes as a potential source of income.

In fact, a 2006 Royal LePage Real Estate Services study revealed that 28% of 50-plus Canadians plan to sell their homes as they age — almost half of them (46%) because they want access to the equity.

House-rich, cash-poor retirees have four main options if they want to draw wealth out of their principal residences: a reverse mortgage, a secured line of credit, downsizing or renting out space to a tenant. Each choice has its pros and cons, and each suits a different type of client.

The key concepts for financial advisors, says Caroline Nalbantoglu, a senior financial planner with PWL Advisors Inc. in Montreal, are to listen carefully, identify retirees’ priorities and accept that decisions related to a house can be emotional.

“You can’t ignore the psychological aspect of it, especially at that age when everything is uncertain,” she says. “They’ve stopped working and there’s less income coming in. They’re wondering, ‘What if I live to be 100? What if I’m sick? Who is going to take care of me?’ They have to be comfortable with their choices.”

> Reverse Mortgage. There are signs the sleepy reverse mortgage market is stirring. Since it was founded in 1986, the Canadian Home Income Plan Corp. has amassed a portfolio of 6,560 reverse mortgages, with an accrued value of $654.6 million as of June 30.

A new player, New Zealand-based Seniors Money Inter-national, has launched Seniors Money Canadawith a marketing campaign in Ontario that started in September; it plans to go national in 2008.

Even with the promise of competition, many financial advisors are cautious about recommending reverse mortgages to their clients. A reverse mortgage provides a lump-sum payment and sometimes additional regular payments to clients over age 60 based on a percentage of the appraised value of a home (up to 40% with CHIP, to a maximum of $500,000; 10%-45% with Seniors Money Canada, depending on age). The debt is generally repaid when the house is sold upon the homeowner’s death or move to other accommodation.

Cathie Hurlburt, a financial planner with Integrated Planning Group in Vancouver, describes one client, now aged 84, who had previously taken out a reverse mortgage but then couldn’t bear to watch the loan grow. Eventually, he sold his house to get out of debt.

“The client really has to think it through,” Hurlburt says. “Are you going to be OK owing money? Or, when it gets bigger every month, is that going to make you crazy — when you’ve long forgotten the renovation or the holiday or the new car?”

The advantages of a reverse mortgage are that it provides a tax-free sum of money that your client can use for any purpose and that does not have to be repaid until the client sells the home or dies. The disadvantages are that interest rates are higher than for conventional mortgages, and your clients may not have equity in the house to pass on to the next generation.

“You have to tread very carefully,” says Tina Tehranchian, a branch manager at Assante Capital Management Ltd. in Richmond Hill, Ont. “Seniors definitely need to consult a financial advisor and get independent legal advice. Once you sign up for a reverse mortgage, it’s very tough to get out of it. The breakup fees are usually exorbitant. I would normally recommend leaving it as a last option.”

> Line Of Credit. If retirees have good credit, they may be eligible for a line of credit secured against their homes. There are one-time set-up fees, but the chief benefit is a relatively low rate of interest — frequently at or near prime. Often, the loan is structured so only the interest is payable each month. As a result, the principal amount of the debt remains constant. However, seniors already struggling to make ends meet may have trouble qualifying and making their monthly interest payments.

“For someone who may have a temporary funding requirement, I like the home equity line of credit because it gives you more flexibility in terms of repayment,” says Patricia Lovett-Reid, senior vice president with TD Waterhouse Canada Inc. in Toronto. “You get to stay in your home, there are no age restrictions and, if you take the money out to invest in the equity markets, the interest you pay is deductible.”

@page_break@Fraser Smith, a Victoria-based financial strategist best known for his “Smith manoeuvre” to turn mortgage debt into a tax-deductible investment loan, suggests that a secured line of credit is essentially a way for retirees to purchase a pension — if they set it up properly and invest appropriately.

> Downsizing. Remind clients that downsizing means cheaper, not just smaller. When your clients think about “downsizing,” they may imagine a smaller space — but one with all the amenities in a great location. The result could be a condo that costs just as much as the house they’re selling, plus moving expenses.

“Test drive it before you actually go out and do it,” advises Lovett-Reid. She herself tried to downsize when her children left for university — and then upsized again. “It didn’t work because it wasn’t a lifestyle and living space that we had been accustomed to, and it wasn’t one that we felt ready for,” she says. “We were probably in the place less than eight months, so it was a costly mistake.”

That said, downsizing to a significantly less expensive home can free up a large sum of money that can be invested to generate an income stream or used to purchase an annuity. Best of all, says Hurlburt, it is a way for clients to continue to live within their means rather than incurring debt.

> Renting Out Space. Becoming a landlord is another option that Gary Siegle, regional business leader, Prairies, at mortgage broker Invis Inc. in Calgary, says renting out space is becoming “quite common.” It is becoming so common, in fact, that lenders and mortgage insurers are introducing investment property programs to facilitate it.

Scott Ward, a financial advi-sor with Edward Jones in Toronto, has two clients who are renting out their basements to bring in additional income in retirement. “They are active people and they enjoy it, plus they like knowing there’s someone else in the house from a safety point of view,” he says.

But, he cautions: “You’re becoming a landlord and you have tenants — and all the good and bad that goes with that.”

The “bad” may include thorny landlord/tenant relationships, property management commitments that stand in the way of retirement travel plans and a loss of privacy. “Renting out part of your property is a lifestyle decision as well as a financial decision,” says Tehranchian. “It’s not for everybody.”

Retirees who are thinking about renting out space should be aware that rising housing prices do not necessarily translate into equally buoyant monthly rent cheques.

“The rental market has a tendency to trail housing prices in an expansion,” says Phil Soper, president and CEO of Royal LePage in Toronto. “Right now, depending on which part of the country you’re in, we’re in the tenth year of an expansion in which prices have been [growing] at above the rate of inflation. Rental rates just haven’t had a chance to catch up.”

Smith emphasizes that he would prefer to intervene earlier so retirees never have to choose between their homes and adequate incomes. He would tell a client: “These solutions are a list of some bad answers to a tough question. If you’re going to take the equity from your house in any one of these solutions, then get it out now while you still have a chance to make a mistake and have time work for you instead of the bank.” IE