Home » HELOC vs. Reverse Mortgage: What’s The Difference?
House paper model and dollar hessian bags on a wood balance scale

HELOC vs. Reverse Mortgage: What’s The Difference?

/in /by Rebecca

When tapping into your home’s equity in Canada, two common options for seniors are a Home Equity Line of Credit (HELOC) and a reverse mortgage. Both pathways allow you to access the equity in your home but function quite differently. This article will explore the key differences between a HELOC and a reverse mortgage to help you make informed decisions about your finances in retirement.

HELOC vs. Reverse Mortgage: Main Differences

  • HELOCs are a revolving line of credit that allows you to keep borrowing once you pay it back. Reverse mortgages can be accessed in increments over time but are not re-advanceable.
  • HELOCs require monthly interest-only payments, while reverse mortgages do not require recurring payments, principal or interest.
  • HELOCs require good credit and proof of stable income. Reverse mortgages do not consider these factors—instead, lenders look at your age, equity, and property location.

What is a HELOC?HELOC phrase on the piece of paper.

A Home Equity Line of Credit (HELOC) is a secured form of credit that allows you to borrow money against your home’s equity. It’s “revolving” because you can borrow the money, pay it back, and keep borrowing. It operates like a credit card, with a predetermined credit limit based on the home’s appraised value.

Who is a HELOC for?

HELOCs are suitable if you have a steady source of income, good credit, and a need for flexible access to funds. They are often used for home renovations, debt consolidation, or other planned expenses.

Pros of a HELOC

  • Flexibility: Offer flexibility in borrowing and repayments, allowing you to access funds as needed and make interest-only payments if desired.
  • Lower Interest Rates: Typically have lower interest rates than other unsecured credit types, such as credit cards.
  • Tax Deductible: In Canada, the interest on a HELOC may be tax-deductible if you use the funds for investments 

Cons of a HELOC

  • Variable Interest Rates: HELOC interest rates can fluctuate with market conditions, making it challenging to predict future payments.
  • Risk of Over-Borrowing: The revolving nature of HELOCs can lead to overborrowing and potential financial strain if not managed responsibly.

What is a Reverse Mortgage?

reverse mortgage question - writing and sketch on a napkin

A reverse mortgage is for seniors aged 55 and older in Canada. It allows you to access a lump-sum portion of your home’s equity as a tax-free income stream without making monthly mortgage payments.

Who is a Reverse Mortgage for?

Reverse mortgages are ideal for adults 55 and older looking to supplement their retirement income. This money can cover any expenses of your choosing. Repayment of the loan occurs if you move or pass away. 

Pros of a Reverse Mortgage

  • No Monthly Payments: You are not required to make monthly payments as long as you reside in the home. 
  • Does Not Consider Credit or Income: You can qualify for a reverse mortgage even if you don’t have good credit or proof of a stable income stream.
  • No Risk of Default: As long as you comply with the terms, you cannot be forced to sell your home to repay the reverse mortgage, even if the loan balance exceeds the home’s value.

Cons of a Reverse Mortgage

  • Repayment in Full: When the time comes, you or your estate must repay the principal and interest accrued in full, just like any other mortgage
  • Interest Can Accumulate Fast: Since you don’t need to pay off the loan immediately, interest can accumulate rapidly.  If you choose not to pay anything against the interest, it will compound faster than if you make optional interest payments.

Making the Right Choice

The choice between a HELOC and a reverse mortgage in Canada depends on your individual financial situation and goals. HELOCs are a good option for seniors who need small amounts of money and can handle the minimum monthly interest-only payment. On the other hand, reverse mortgages are an excellent choice if you want to access a portion of your equity without the need to qualify or the burden of monthly payments. 

Need assistance with securing your financial future in retirement? Contact us at Seniors’ Lending Centre for advice on the best options for your unique circumstances.

Rebecca Awram Headshot

Rebecca

Rebecca Awram is a BCFSA-licensed independent mortgage broker with nearly 15 years of experience. She brings a wealth of financial and business knowledge from over two decades in software development, investments, and real estate. She holds degrees from the University of British Columbia, Douglass College, and Simon Fraser University. Rebecca is also an active member of the local Chamber of Commerce and CMBA-BC.

Specializing in senior mortgage solutions, Rebecca offers impartial, patient, and diplomatic advice combined with sharp negotiation skills when you need them most. She’s committed to finding tailored mortgage options for your unique needs, such as reverse mortgages, traditional mortgages, or home equity loans. Beyond her professional life, Rebecca loves everything outdoors, including hiking, backpacking, cycling and kayaking.

Indi Mortgage, formerly Axiom Mortgage Solutions | 6 - 20691 Lougheed Highway Maple Ridge BC | 8661 201 Street 2nd Floor Langley BC | Direct (604) 614-2382
Your Guide to Reverse Mortgages Following Bankruptcy bankruptcy and reverse mortages An elderly couple sit arm-in-arm at a table across from a woman in a suit showing them something on a stack of paper. Inflation and Your Retirement Plan: Could a Reverse Mortgage Be Key?