Many of us are familiar with how a home equity line of credit (HELOC) works. It’s a secured form of credit where the lender uses your home as a guarantee that you’ll pay back any money borrowed.
It’s also a revolving form of credit, which means you can borrow from it, pay it off and borrow from it again—as long as you stay under the maximum credit limit.
There are a few downsides to using a HELOC, however, warns Mich Sneddon, Chartered Accountant, Mortgage Agent and Certified Reverse Mortgage Specialist. “First, you have to actually have the income and credit to qualify for one, which many retirees do not. Second, you need to keep making monthly payments, or you risk losing your home.”
“Third, all HELOCs have a variable interest rate—so you’ll have seen payments increase massively in the past 2 years—with the Bank of Canada saying more rate hikes are coming.
This creates additional stress and anxiety not knowing what you’ll need to be paying each month, especially watching it increase in the way it has recently.”
The rise in reverse mortgages
Every year, reverse mortgages have become more and more popular as the negative stigma has been cleared. New competition in the market from different lenders has helped with this.
“While there are still many sources of incorrect information about them out there, it’s now much easier to find reliable and trustworthy education—which is what I built my entire Reverse Mortgage Pros service for,” says Sneddon.
“In the first half of this year, I’ve seen applications for reverse mortgages up over 30% compared to the same period in 2022,” says Sneddon. Every year they seem to grow around 20% to 30% in popularity.
The demographics still trend slightly older, with the most popular age for reverse mortgages being retirees around 65 to 75 years old.
The equity question
Many homeowners are curious about how a reverse mortgage will affect their equity. The impact on home equity depends on multiple factors: your age, how much you borrow and how much the growth in the value of your home offsets the interest.
“For example, let’s assume you have a $750,000 home and you borrow one third of it— $250,000—as a reverse mortgage. If your home value goes up just 2.5% each year, which is well below the long-term averages in Canada, you’ll actually be increasing your home equity: the growth in the value of your home will outpace the reverse mortgage interest,” he explains.
A good rule of thumb is that if you take out a reverse mortgage for half your home, your home needs to grow in value at half the rate of the reverse mortgage for you to not lose any equity.
“I have a reverse mortgage calculator on my site where folks can run their own calculations and see the exact numbers and the impact on their home equity over time,” says the CPA.
Competition = more options for consumers
Currently there are three lenders of reverse mortgages in Canada: Home Equity Bank, Bloom and Equitable Bank.
Until 2021 to 2022, Home Equity Bank was the only provider; now that there is more competition, the products and services available have improved, which is great news for consumers.
The biggest benefit to choosing a reverse mortgage over a traditional HELOC is that it frees up your cash. You no longer have to make monthly payments, which, if you don’t make, you risk losing your home.
Rates for a HELOC are also much higher now than reverse mortgages; it used to be the other way around. “It’s likely that in the long term we could revert to the situation where HELOC rates are lower than reverse mortgage rates,” says Sneddon, “but for now that’s not the case.”
He wrote an article that compares reverse mortgages and HELOCs. There is also a helpful video you can watch.