Reverse Mortgages vs. Home Equity Lines of Credit
Looking for a loan you can live with?
If you want to access the equity in your home without selling your house, most people think of a ‘home equity line of credit’ first. But, if you’re over 55 and own your own home, there may be a better option: a reverse mortgage.
Which is better: a home equity line of credit or reverse mortgage? Let’s compare and see.
Short-Term vs. Long-Term Needs
With a line of credit, you borrow money and begin paying it back (with interest) immediately. This makes sense if your needs are short-term and you have the income to pay it back quickly. But what if you need the money for a longer period of time? Then you have to be prepared to make regular monthly payments for some time to come. If you’re like many Canadians living on a fixed income, these extra monthly payments could be too much for your budget to handle over an extended period of time.
A reverse mortgage is different because you can choose not to make any payments until you decide to move or sell your home. Instead, the interest simply compounds on the outstanding balance of the reverse mortgage while the entire value of your home also continues to appreciate. When you sell your house, you pay off the accumulated amount of the loan and keep the rest.
Reverse mortgages are designed specifically for Canadian homeowners who don’t want to service a loan over time or have concerns about their financial position in the future. Reverse mortgages are an excellent way to supplement your income on an ongoing basis. You can choose to access a fixed amount each month. Or you can take out a lump sum and use it to build an investment portfolio that will generate extra cash flow.
How Much Can You Borrow?
Some home equity lenders allow you to borrow up to 80% of the value in your home. This is good if you need a lot of money. But, in reality, home equity loans are awarded based on your ability to repay them. So people living on fixed incomes may find they can’t access the full 80%.
Reverse mortgages, on the other hand, let you borrow up to 50% of the value in your home. This protects the equity in your home and helps ensure there’s still residual value in it after the loan is repaid. It’s a more conservative approach to lending and it seems to be working.
In fact, according to the CHIP Home Income Plan, the leading provider of reverse mortgages in Canada, most of its clients still have more than 50% equity in their home when they sell. That’s good news for people who want to have some money to give to their heirs or to finance the next stage of their retirement.
Staying in Your Home
Both home equity lines of credit and reverse mortgages use your house as collateral. But lines of credit provide you with access to cash only for as long as you can service the interest payments. So if your income decreases, you could be forced to sell your home to pay off the loan. But with a reverse mortgage, you can never be forced to sell or move. Ever.
A Case Study
So which is the better way to get at the equity in your home? Don and Michelle faced that same question. Don is in his early 70s, Michelle in her late 60s. Don recently had a stroke that left him partially immobilized. At first, they considered selling their house and moving into a retirement home. But they both love their home (especially the garden).
Instead of moving, they decided to fix up their house so it would be easier for Don to get around (wheelchair ramps, railings, etc.). It was a large investment, but worth the expense so they would be able to stay in their home. The question was how to pay for it.
They considered a home equity line of credit, but were worried if the payments would affect their monthly cash flow. They were also concerned that, if Don passed away, Michelle’s household income would drop and she would have trouble making the monthly payments and might be asked to repay the line of credit as a result. That would mean selling the house.
So they took out a reverse mortgage instead. This gave Don and Michelle the money they needed to stay in their home safely and the peace of mind that comes from knowing they wouldn’t have to sell their home until they were ready to.
In The End…
Home equity lines of credit and reverse mortgages are both viable borrowing options. Before making a decision, it is important to take into account your short-term as well as long-term objectives, and financial outlook. If you want a solution that offers stable and predictable access to your home equity now and in the future, a reverse mortgage may be the right choice for you. And with reverse mortgage rates being so low, many Canadians are finding them to be a very attractive solution.
In Canada, reverse mortgages are available through CHIP Home Income Plan, provided by HomEquity Bank. You can also get a CHIP Home Income Plan at any of the major banks, credit unions and many mortgage brokers. Be sure to ask for it by name.
CHIP Home Income Plan is provided by HomEquity Bank, a Schedule I Canadian Bank. HomEquity Bank is a subsidiary of HOMEQ Corporation, a TSX-listed company.