‍Learn the key differences between reverse mortgages and HELOCs. Find out which option is best for you and your financial needs with Bloom.

Accessing the equity they’ve built up in their homes is helping many Canadians over 55 boost their income and quality of life. 

Two popular options are reverse mortgages and home equity line of credit (HELOCs). 

Each offers distinct benefits and drawbacks.

In this guide, we will explore reverse mortgages and HELOCs, highlighting their key differences, advantages, and disadvantages, to help you make an informed decision.

What is a reverse mortgage?

A reverse mortgage is a financial product available to Canadian homeowners aged 55 and older. You can access up to 55% of the value of your home while continuing to own 100% of it. 

Unlike traditional mortgages, you do not make regular payments. Instead, the loan is repaid when the home is sold, you move out, or you pass away.

Read more: What is a reverse mortgage? Everything you need to know

What is a home equity line of credit (HELOC)?

A home equity line of credit  (HELOC) is a line of credit secured by your home. It allows homeowners to borrow against the equity in their property, typically up to 65% of the home’s value. Unlike a reverse mortgage, a HELOC requires regular payments on the interest and sometimes the principal too, depending on the lender’s terms.

The key differences between reverse mortgages and helocs

Understanding the key differences between reverse mortgages and HELOCs will help you determine which option best suits your financial situation.

Loan structure  

- Reverse Mortgage: Provides a lump sum, regular payments, or a combination of both, with no required monthly payments.

- HELOC: Functions as a line of credit, allowing you to borrow as needed up to a predetermined limit. Regular payments on interest and principal are required.

Repayment terms  

- Reverse Mortgage: The loan is repaid when the homeowner sells the property, moves out, or passes away. Over 99% of reverse mortgage customers have equity in their home when the time to repay the loan arrives. In most cases, the amount of equity is more than 50% of the home value. 

- HELOC: Requires monthly payments during the draw period and possibly a repayment period afterward.

Interest rates and fees  

- Reverse Mortgage: Typically has higher interest rates and fees compared to traditional mortgages.

- HELOC: Often offers lower interest rates, but these can be variable and fluctuate over time.

Impact on homeownership  

- Reverse Mortgage: You retain full ownership of your home.

- HELOC: You retain full ownership, but must adhere to regular payment schedules.

Eligibility  

- Reverse Mortgage: Requires homeowners to be at least 55 years old and have home equity.

- HELOC: Requires a good credit score and sufficient income to cover payments.

Advantages of reverse mortgages

Access to home equity  

Reverse mortgages allow you to unlock your home’s equity, providing funds for various needs without selling your property. You can use Bloom’s free calculator to see how much money you could qualify for. 

No monthly mortgage payments  

Unlike traditional mortgages or HELOCs, reverse mortgages do not require monthly payments, freeing up your budget for other expenses.

Flexibility in payment options  

Funds can be received as a lump sum, regular payments, or a combination, offering flexibility in how you use the money.

Non-recourse loan  

Reverse mortgages are non-recourse, meaning you or your heirs will never owe more than the home’s value at the time of sale.

Tax-free income  

The funds from a reverse mortgage are not considered taxable income, providing financial relief without tax implications.

Peace of mind

With a reverse mortgage, you “set it and forget it”, then receive cash when you need it. As long as you continue paying property taxes and insurance and maintaining your home, you won't have to make mortgage payments during the loan term. 

Read more about the pros and cons of reverse mortgages in Canada

Disadvantages of reverse mortgages

Accumulating interest  

Interest accumulates over time, increasing the total amount owed and reducing the equity in your home.

Impact on inheritance  

Since the loan must be repaid when the home is sold or the last owner passes away, it can reduce the inheritance left to your heirs. Read more about paying back a reverse mortgage here.

Eligibility requirements  

Reverse mortgages in Canada require homeowners to be at least 55 years old and have sufficient home equity, typically allowing access to up to 55% of the home's value.

Obligation to maintain the home  

Homeowners must maintain the property and keep up with taxes and insurance to avoid default.

Advantages of HELOCs

Flexibility in borrowing  

HELOCs provide the flexibility to borrow as needed, only paying interest on the amount used.

Lower interest rates  

HELOCs often have lower interest rates compared to other types of loans, especially during the draw period.

Access large sums of money  

Homeowners can access significant funds, depending on their home equity and creditworthiness.

Interest-only payments during draw period  

Many HELOCs allow for interest-only payments during the initial draw period, reducing monthly payment amounts.

Disadvantages of helocs

Variable interest rates  

HELOCs have variable interest rates, which can increase, leading to higher payments over time.

Fees and closing costs  

HELOCs can come with various fees and closing costs, which may add up significantly.

Impact on credit score  

Using a HELOC can affect your credit score, especially if borrowing limits are approached or payments are missed.

Temptation to overspend  

The availability of credit may lead to overspending, potentially resulting in higher debt levels.

How to choose the right option for you

When deciding between a reverse mortgage and a HELOC, consider the following factors:

• Your age and eligibility
• Your financial goals and needs
• The stability of your income
• Your willingness to make regular payments

Scenarios where reverse mortgage is more suitable  

You want to pay off an existing mortgage.

Example: Sarah, 68, still has a mortgage balance and finds the monthly payments challenging on her fixed income. By opting for a reverse mortgage, she can pay off her existing mortgage, eliminating monthly payments and freeing up her budget. This gives her financial peace of mind while allowing her to stay in her home.

You are retired and want to supplement your income without monthly payments.

Example: John and Mary, a retired couple in their 70s, rely primarily on their modest pension. To maintain their quality of life and cover unexpected expenses like medical bills, they opt for a reverse mortgage. This allows them to receive monthly payments from the equity in their home without having to make any loan repayments, easing their financial burden.

You have significant home equity and wish to remain in your home.

Example: Jane, a widow in her late 60s, has paid off her mortgage and has a substantial amount of equity in her home. She loves her neighborhood and has no intention of moving. A reverse mortgage enables her to tap into her home equity to cover home maintenance costs and enjoy her retirement, all while continuing to live in her beloved home.

You want a non-recourse loan with tax-free income.

Example: David, 75, wants to help his grandchildren with their university tuition. By taking out a reverse mortgage, he can provide financial support without affecting his savings or investments. The funds from the reverse mortgage are tax-free and, because it's a non-recourse loan, David or his estate will never owe more than the home’s market value at the time of repayment.

You have home equity but a bad credit rating.

Example: Michael, 72, has a poor credit score and finds it difficult to qualify for traditional loans or a HELOC. A reverse mortgage is a suitable option for him because it primarily considers the value of his home and his age, rather than his credit history. This allows Michael to access the equity in his home without the need for a strong credit score, providing him with the funds he needs to cover daily expenses and unexpected costs.

How does a reverse mortgage work in Canada? Find out here, with real world examples

Scenarios where a HELOC is more suitable  

- You have a steady income and can manage regular payments.

- You need flexible access to funds for various purposes.

- You are comfortable with variable interest rates and potential payment fluctuations.

Why use Bloom for your reverse mortgage in Canada?

Choosing Bloom for your reverse mortgage offers several unique benefits:

• Complete transparency with no hidden fees or unexpected charges.
• Quick decision-making process to get you the funds you need.
• Competitive rates and minimal fees make Bloom a cost-effective choice.
• Access your funds with flexibility and convenience with Bloom’s Home Equity Prepaid Mastercard, the first of its kind in Canada. 
• Exceptional customer service: Personalized support and expert advice throughout the entire process.
• Home equity guarantee: Bloom offers a Home Equity Guarantee, so you and your heirs will never owe more than the fair value of your home.

Conclusion

Both reverse mortgages and HELOCs offer valuable ways to access your home equity, but they cater to different financial situations and needs. By understanding the key differences, advantages, and disadvantages, you can make an informed decision that best suits your financial goals. For expert guidance and to explore if a reverse mortgage is right for you, contact Bloom today. Get a Quote Today and secure your financial future with confidence.

Reverse mortgages and HELOCs both provide useful options for tapping into your home equity, but they are tailored to meet different financial needs and circumstances. 

By knowing the main differences, along with the pros and cons of each, you can choose the option that aligns best with your financial objectives. 

For personalized advice and to determine if a reverse mortgage is the right choice for you, reach out to Bloom. Call 1-866-882-5666, or leave us your contact information here and we’ll call you at your preferred time.

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