With home values flying, more seniors are choosing to tap their equity with a reverse mortgage.
Reverse mortgage debt in Canada set a new record in the fall, reaching just shy of $4 billion, according to the Office of the Superintendent of Financial Institutions. That’s up 14% compared to the previous year, roughly three times the growth rate for regular mortgages (4-5%).
But reverse mortgages aren't the only option for seniors in need of cash, particularly those who don’t want to withdraw their home equity in one big lump sum.
A Refresher on How Reverse Mortgages Work
Reverse mortgages allow seniors aged 55 years and older to convert their home equity to cash.
They're commonly used by retirees who want to stay in their home, but who don’t have sufficient retirement savings to live off of.
Reverse mortgages allow them to withdraw a lump sum amount of tax-free cash, and/or receive instalment payments over time.
At the age of 55, the minimum to qualify, a homeowner would be able to withdraw approximately 15-20% of their home’s value. And no matter the age of the applicant, they will never owe more than the home is worth.
Where Can You Find the Lowest Reverse Mortgage Rates?
There are only two national reverse mortgage providers in Canada, and right now one is a clear rate leader. That lender is Equitable Bank (a.k.a. EQ Bank).
EQ Bank has announced two reverse mortgage rate drops this year so far, bringing its lowest available rate down to 4.44%. That's for a 1-year term for borrowers taking a lump-sum payment.
For a 5-year term, EQ Bank is offering 4.74% for lump-sum borrowers. Compare that to 5.59% for competitor HomeEquity Bank.
Here’s a comparison of reverse mortgage rates for all terms and for both lenders.
What Are the Best Alternatives to Reverse Mortgages?
Home Equity Lines of Credit (HELOCs) have long been a popular alternative for those not wanting to withdraw large amounts of home equity at one time. With a HELOC, you can borrow up to an approved amount as needed and pay back interest-only instalments on your own terms.
But with Equitable Bank's recent rate drops, the lowest available reverse mortgage rate is now below typical HELOC rates of prime + .50%.
Should reverse mortgage rates drop any further, even more seniors will start viewing them as primary retirement income strategies.
That said, HELOCs shouldn’t be written off. You can find some with rates as low as 3.95%. If you can qualify, and most seniors in need of cash cannot, a HELOC can usually make your nest egg go further.
Tips for Those Who Qualify for a HELOC
Those choosing HELOCs over reverse mortgages can end up paying about 40% less interest over 10 years. But remember, you’re making monthly interest payments with the credit line.
Here are a few best practices if you can qualify for a HELOC:
- Keep your HELOC limit at about 75-80% of what you’d get with a reverse mortgage. This ensures you can always refinance into a reverse mortgage if you can't keep up with the HELOC payments, or if the HELOC is frozen for some reason by your lender.
- Apply for one before you retire while your income is higher. That can maximize your odds of being approved, versus applying in your Golden Years.
- Manulife One’s HELOC is one of the best options for seniors since the bank (in our experience) isn't as worried about increasing debt loads, so long as your income is deposited into the Manulife One account.
- If needed, and depending on the lender, you can sometimes make the required interest-only payments directly from the HELOC itself, so you're not out-of-pocket each month.
- It's always best to chat with an experienced broker to verify the right strategy for your personal scenario.
Tips for Those Who Opt for a Reverse Mortgage
For seniors who don’t qualify for a HELOC, a reverse mortgage is often the only remaining choice.
Here are a few tips to maximize your savings:
- If you require a lump sum amount of cash, consider EQ Bank. Even though it doesn't have the brand recognition of CHIP (HomeEquity Bank), its lower rates for lump-sum withdrawals can save you thousands in interest.
- If you require the maximum amount you can qualify for, look to HomeEquity Bank. It allows up to 55% loan-to-value (LTV), depending on your age, location, etc. Sometimes even more. By comparison, EQ Bank’s maximum LTV is 40%.
- If you want the flexibility to take money out as needed, both are good options. But you'll pay a little more. In that case, you may want to choose the lender with the:
- Lowest setup fees
- Highest approval limit (if you need it), and/or
- Lowest penalties (in case you might need to break the reverse mortgage early).
Hint: As of the date this is being written, EQ Bank offers lower penalties and lower setup fees (by roughly $1,000).