At a time when pension plans are under financial strain and there are questions about whether Canadians are prepared for retirement, a new report by Statistics Canada looked at how unmeasured income from home equity is "an important source of well-being for retirement-age households."

The report measured the value of home equity in paying for the costs of shelter, and determined that it increases income of those aged 60 to 69 by 10 to 12 per cent. For those aged 70-plus, it increases income by 12 to 15 per cent.

"Because the level of equity that is accumulated in homes may differ greatly between retirement-age and working-age Canadians, it is important to take this income into account – otherwise, the gap in the reported income across age groups that is derived from traditionally measured sources may be overstated," says the report.

The amount of equity that Canadians have in their homes is often cited as a key reason why Canada isn't likely to experience a real estate meltdown like that seen in the U.S., where home equity rates are much lower.

Canadians have about $2.06 trillion in home equity – or 70 per cent of the total value of homes. Homeowners with a mortgage hold about 53 per cent in home equity, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP).

Despite the tough economic climate of the last few years, CAAMP says the number of people who are taking equity out of their homes or increasing their mortgage principal is going down, not up. It was 11 per cent last year, compared to 15 per cent a year ago. The average amount of equity taken out also dropped, to $33,500 from $42,500 in 2009.

Twenty-nine per cent of those loans were used for renovation or home repair, as homeowners maintained or increased the value of their largest financial asset. However, 42 per cent were used for debt consolidation or repayment.

For those 60 and older, reverse mortgages are advertised as a way to get cash without having to sell your home. In Canada is it offered mainly by one company, HomeEquity Bank, and it's known as the Canadian Home Income Plan (CHIP). The company says, "Without having to sell your home, you can receive up to 40 per cent of the value of your home. The big advantage with CHIP is that you do not have to make payments – interest or principal – for as long as you or your spouse live in your home."

The Financial Consumer Agency of Canada (FCAC) says that among the advantages of a reverse mortgage are that you don't have to make regular payments on the loan; the money you get is a tax-free source of income; it does not affect your Old-Age Security or Guaranteed Income Supplement benefits; and you can receive the money as either a lump-sum payment or as a regular stream of income.

However, reverse mortgages have plenty of critics as well. To begin with, the interest rate is higher than most mortgages or a traditional line of credit. There are also other fees: CHIP says an appraisal fee ($175 to $400), independent legal advice ($300 to $600) and other legal, closing and administrative costs ($1,495) must be paid.

Unlike the traditional Canadian way of paying down a mortgage as you grow older, a reverse mortgage is exactly that – it grows as you get older and interest is charged on the loan, and the equity in your home decreases. If you don't pay off any of the debt, the interest debt compounds so you pay interest on the interest. Unless the money borrowed is used for an investment, the interest payments are non-deductible on your income taxes.

"At your death, your estate will have to repay the loan and interest in full within a limited time. The time required to settle an estate can often exceed the time allowed to repay a reverse mortgage," says FCAC. Having a reverse mortgage also means that there will be less money in your estate to leave to your children or other heirs.

Seniors are advised to look into taking out a regular mortgage or a line of credit to see if that works better for them. You could also sell your home to a family member or third party, with an agreement that you have the right to live there for as long as you wish, says FCAC.

In the end, most seniors sell their homes to help fund the next stage in their life – a smaller home or condo or perhaps a move to an assisted living facility. The more equity that remains in the home, the more choices you'll have when you reach that stage of your life.

Published: August 17, 2010

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Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .