Reverse mortgage vs HELOC: Deciding the best way to access the equity in your home

A growing number of homeowners—particularly in Canada’s urban centres—are finding themselves in the unexpected situation of being millionaires, at least on paper. In the City of Toronto and Greater Vancouver Area, for example, the average price of a detached home rang in at $1.51 million and $1.49 million, respectively, this August. 

But while homeowners in these cities and others are becoming “house rich” and possibly even joining the millionaire’s club, it doesn’t mean they suddenly have a whack of money to spend. On the contrary, they may have prioritized paying off the mortgage over long-term savings and investments, leaving them cash poor.

“There are so many costs associated with living in a major city and owning a property that there might not be a lot of money left over to max out your RRSPs or TFSAs,” says Jackie Porter, a Mississauga, Ont.-based CFP and financial advisor serving professionals, businesses and families with cash flow management and tax planning. 

Problem is, if you face a job loss or emergency expense; you retire without adequate pension income; or you just want to unlock some of the wealth tied up in your property, it can be challenging to access that cash. “It’s not money you can get at without jumping through a lot of hoops,” she says.

How to access the equity in your home

There are four basic ways homeowners can tap into the cash locked-in to their properties:

Downsize, sell or rent out your home

Selling or renting out your property will obviously give you some much-needed cash, but you still need to live somewhere. Unless you’re prepared to move to a location where properties and/or rents are significantly cheaper, you might not come out that far ahead—especially after real estate fees, land transfer taxes (if buying another property) and moving costs. 

Refinance your mortgage or take out a new one. Interest rates are at historic lows, so you may be able to borrow additional money on your mortgage (or take out a second one) and get a one-time cash payment at rock-bottom rates. Of course, you’ll not only have to pay the money back according to the lender’s amortization schedule, you’ll also have to qualify under the government’s rigorous mortgage stress test and/or new eligibility rules for mortgage insurance. If you have too much debt or your income isn’t high enough, you could be out of luck. 

Take out a home equity line of credit (HELOC)

A HELOC allows you to borrow money on an as-needed basis (up to a set amount that you negotiate with your lender); you’re required to pay monthly interest only on the amount you’ve borrowed (although you can pay more if you wish). Rates are lower than for other lines of credit because the loan is secured by your property and, unlike a mortgage, there is no schedule of payments on the principal. You pay off the loan when it’s convenient for you—but you must make your interest payments on time, or you can risk losing your home depending how large the loan is.

Get a reverse mortgage

A reverse mortgage provides you with either a lump sum, or a larger upfront amount followed by regular cash payments paid out on a schedule you choose, such as weekly or monthly. In total, the reverse mortgage can be valued at up to 55% of the market value of your home. You’ll be charged monthly interest on the amount borrowed. But unlike a traditional mortgage or HELOC, you don’t have to make any payments—neither interest nor principal—until you sell the house or die. As long as to comply with the terms of your mortgage, there is no risk of losing your home, and the lender guarantees you will never owe more than the property is worth.

Who can get a reverse mortgage?

Canadians who are at least 55 years of age are eligible to take out a reverse mortgage on their primary residence, assuming the market value of the property is over a certain threshold (for example, $250,000).

While there are no income requirements to qualify for a reverse mortgage, the size of your loan (the principal, or amount borrowed) must be above a set minimum designated by the financial institution (at Equitable Bank, it’s $25,000). 

Snowbirds take note: you must live in your home for at least six months of the year to qualify for a reverse mortgage. 

In any case, you don’t need income to qualify, and you can choose the interest rate term you prefer, from 6 months to 5 years.

Reverse mortgage vs. HELOC

In an ideal world, Porter says homeowners would proactively apply for a HELOC, even if they don’t think they’ll need to borrow any money, so long as they are disciplined enough not to use their home as a piggy bank. “Think of borrowing as a type of insurance policy. Get the loan before you need it, while you look good on paper,” she says, referring to the stringent income and debt restrictions that lenders require.

For those who missed the boat and currently can’t qualify, or are so cash-strapped even the interest payments on a HELOC are too onerous, a reverse mortgage could fit the bill. 

“It’s easier to get and you don’t have to pay back anything while you live in the house, which is good when cash-flow is super tight,” says Porter. But she’s also quick to note that interest is still being calculated, and all the interest and loan amounts will be deducted from the proceeds of the home if the owners sell, or off the tally of their estate if they stay in the home for the rest of their lives.  

For more information about The Equitable Bank reverse mortgage, and how it might fit into your financial plans, click here.