Reverse Mortgage vs HELOC vs Refinance: Which Home Equity Option Fits Retirement?
A reverse mortgage, a HELOC and mortgage refinancing all let you borrow against your home. The main difference is how you receive the money, what you must pay each month and how the debt is eventually repaid.
In retirement, the lowest interest rate is only one part of the decision. A loan also needs to fit your income, the expense you want to cover and your plans for staying in the home.
This comparison explains the payment requirements, approval process and costs of each option so you can have a more useful conversation with your mortgage broker.
In this guide
What is the difference between the three options?
Reverse mortgage
A reverse mortgage is generally available to eligible homeowners aged 55 or older. Regular mortgage payments are not required, but unpaid interest increases the debt. Repayment is normally due when you sell, move out, the last borrower dies or another repayment event in the agreement occurs.
Home equity line of credit
A HELOC is revolving credit secured against your home. You can borrow, repay and borrow again within the approved limit. Payments are required, even if the agreement allows interest-only payments. The rate is usually variable, so the cost can change.
Mortgage refinancing
Refinancing means changing or replacing a mortgage. You may borrow more against the property, subject to approval, and repay it through scheduled mortgage payments. Increasing the loan is different from renewing the same outstanding balance when a term ends.
The important distinction is between making no required regular mortgage payments and making interest-only payments. A reverse mortgage generally allows the first. A HELOC may allow the second, but you still need income or other funds to cover those payments.
Can you qualify after retiring?
Retirement does not automatically prevent you from getting a HELOC or refinancing. However, owning a valuable home is not enough on its own. The lender also needs to assess whether you can make the required payments.
For conventional mortgage borrowing, lenders review income, debts, credit and the property. Pension statements, tax returns and records of other income may be needed. Tell the lender if your employment income is about to stop so the assessment reflects your retirement income.
OSFI’s mortgage underwriting guideline explains the assessment expected of federally regulated lenders. A HELOC at a bank also requires a stress test to check payment affordability at a qualifying rate.
Reverse-mortgage lenders use their own age, property and other approval criteria. HomeEquity Bank’s CHIP eligibility FAQ describes its requirements. Confirm who must be a borrower and how the rules apply to every homeowner, especially if one spouse is younger.
How much money would you actually receive?
Home equity is the home’s appraised value minus the debt secured against it. A lender will not necessarily let you borrow all of that equity. Product limits, existing debt and the lender’s assessment determine the amount offered.
The FCAC guide to borrowing against home equity explains the different borrowing limits. A maximum shown in general guidance is not an approval for your property.
Compare the cash available for your expense rather than the headline loan amount. Refinancing may use part of the new mortgage to repay the old one. A reverse mortgage may also require existing secured loans to be cleared. Fees can reduce the money left for you.
With a HELOC, the credit limit is different from the amount you draw. You pay interest on the borrowed amount. With a reverse mortgage, the timing of lump-sum or later advances depends on the product. Confirm when funds will be available and what later withdrawals require.
Compare the monthly payment and the total borrowing cost
A lower payment does not always mean a cheaper loan. It may mean you are repaying less of the debt each month or postponing repayment altogether.
With a reverse mortgage, unpaid interest builds up. This can help when monthly income is limited, but it leaves a larger balance to settle later. The FCAC reverse-mortgage overview notes that rates are usually higher than conventional mortgage or HELOC rates.
A HELOC normally requires regular payments. If you pay only the interest, the amount borrowed does not fall. A variable rate can also increase the payment. The FCAC explanation of HELOC payments covers these risks.
Refinancing usually creates a regular principal-and-interest payment. That payment needs to fit alongside property taxes, insurance and everyday spending. If you replace a closed mortgage before the term ends, a prepayment charge and other fees may apply.
Ask for each comparison to use the same cash needed, withdrawal dates and expected repayment date. Include fees and the balance still owing at that date. This shows what you would pay now and what would remain to repay later.
How would you repay the loan if your plans change?
Think about a future move, a change in health or the death of a borrower before choosing the loan. These events can affect your housing costs and the money available for repayment.
A reverse mortgage generally becomes due after specified events, including selling or moving out. HomeEquity Bank’s CHIP repayment guide explains its approach. Deadlines, early-payment charges and the position of a surviving borrower must be checked in the actual agreement.
A HELOC remains a debt even if you have been paying only interest. Review the lender’s rights to change the available credit or require repayment. Do not assume the credit limit will remain available indefinitely.
For a refinanced mortgage, check what it would cost to repay or change the loan before the term ends. If you plan to sell soon, that charge could affect which term makes sense.
If repayment depends on getting another loan later, remember that the new borrowing will need approval. A plan to refinance is not the same as having funds available.
Which option is worth discussing first?
You need money from time to time
A HELOC may be worth comparing if you qualify and can manage its payments. It allows repeated withdrawals within a limit, which can suit expenses that arise at different times. Set a repayment plan for the principal as well as the interest.
You need a set amount and can afford repayments
Refinancing may suit a defined expense when scheduled payments fit your income. Compare the new loan with keeping your current mortgage, including the cost of making a change now rather than at renewal.
You have limited room for monthly payments
A reverse mortgage may be worth considering if you qualify and expect to stay in the home. Compare the benefit of deferring payments with the larger future balance and the effect on a later move.
These are starting points for a comparison, rather than a recommendation for every household. Using other assets, reducing the expense or moving may also be worth discussing.
Powerhaus provides information on reverse mortgages, HELOCs and mortgage refinancing. Bring the expense and your retirement budget to the conversation so the comparison reflects what you need.
Retirement borrowing FAQs
Can I get a HELOC or refinance after I retire?
Yes, retirement alone does not rule either out. Approval depends on the lender’s assessment of your income, debts, credit and property. Ask which documents are needed to show pension and other retirement income.
Why consider a reverse mortgage instead of an interest-only HELOC?
An interest-only HELOC still needs regular payments. A reverse mortgage generally does not require regular mortgage payments, but unpaid interest increases the balance. Compare the payment you can afford with the amount you would owe later.
Can I use a HELOC to make my mortgage payments?
It may be possible to draw funds for that purpose, but you would be borrowing to pay another debt. The HELOC balance would grow unless you repay it, and its own payments would still be due. Review how long that approach could last and how you would repay both loans.
Can I move a HELOC balance into a mortgage?
Some lenders offer a way to convert borrowing into a mortgage portion; other situations require refinancing. Check availability, approval requirements, fees and the new payment. A change in product does not remove the debt.
Should I wait until mortgage renewal to refinance?
Waiting until term end may avoid an early-repayment charge on the current mortgage. It does not remove every refinancing cost or guarantee approval. Compare changing now with waiting, including whether the expense can be postponed. The FCAC guide to mortgage-break costs explains the charges to check.
Talk through the options for your retirement budget
Have your mortgage statement, retirement income records and the amount you need ready. Ask Powerhaus to compare available loans, monthly payments, cash after closing and the amount you could owe when you repay.
General information for Canadian readers. Eligibility and terms depend on the lender and agreement. Obtain independent legal advice and appropriate financial or tax advice for your circumstances.