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.
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.
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.
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.
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:
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:
Hint: As of the date this is being written, EQ Bank offers lower penalties and lower setup fees (by roughly $1,000).