Before I examine the alternatives to a reverse mortgage, I should reveal that I think is a fantastic product, especially in today’s age where many people find themselves to be ‘house rich’ but ‘cash poor’.
But do I think it the best solution for absolutely everyone? Of course not.
Are there alternatives out there? Yes.
Are the alternatives any good? Let’s take a look…
So today I thought I’d examine some of the alternatives that you should consider while making your decision.
But First A Quick Recap – What Exactly Is A Reverse Mortgage?
Before examining the alternatives, it is important to understand what a reverse mortgage is first – for this we suggest downloading our free CHIP reverse mortgage guidebook.
With that out the way, let’s continue with the rest of the article.
1. A Home Equity Line Of Credit (HELOC)
I would start with this as it is without a doubt the alternative option that we hear from the most.
A home equity line of credit is essentially a ‘revolving’ loan which you can dip into at any time.
For example, let’s say the lender gives you a HELOC of $50,000.
You can take as much or as little of the $50,000 as you like. If you take out $0, you pay $0 in interest. But any amounts you do take out are subject to interest.
The most obvious benefit of this product is flexibility – you can take out as little as you like and pay back as much as you want, when you want.
You can pay back 100% of what you took out and minimize the amount of interest you will pay.
Product Comparisons
We have already actually written a detailed article about how you can combine the best of both products into a Line Of Credit.
In addition to this, I will take a look at the differences between this and a Home Equity Line Of Credit:
- – A HELOC is more flexible – as I mentioned above you can put money in and take it out at will. You can pay off the entire loan with no penalty whenever you like – unlike a reverse mortgage, where penalties apply in the first 5 years of the loan.
- – Another advantage is that rates for a HELOC are generally at slightly lower rates. So you save a little on the interest rate.
- – However, a HELOC requires monthly interest payments of the minimum amount. No payments are required for a reverse mortgage.
- – In addition to this, a HELOC is still a conventional loan that you need to qualify for (your income and credit score will be assessed as part of this). This is not the case with a reverse mortgage.
- – Finally, a HELOC could ultimately lead to you losing your home if you don’t keep up with payments. This is also not the case with a reverse mortgage, as no payments are required so you can never lose your home. Ever.
Who Is This A Good Alternative For?
This is the best alternative for those who are just needing short-term cash or to have access to a ‘rainy day fund’.
The reason is because of it’s flexibility – since you only need it for a short-term or emergency basis, you can dip in and out of it when you like.
If you have enough regular income and are not struggling, this might suit you; for those who need the cash for longer-term purposes, a reverse mortgage might be a better solution.
2. Sell Your Home
Easily the 2nd most common alternative is selling your home.
Like a HELOC, we often have clients who are considering this as another option.
This one doesn’t need much explanation and is hard for us to advise you on. However, there are some considerations that you need to make:
- – Where are you going to live and what will the cost of this be?
- – How does this cost compare to a reverse mortgage, HELOC or other alternatives (see below)?
- – Are you physically able to stay in your home and maintain it? This is a very common reason for seniors looking to move.
- – Would moving out of your home make your life better or worse?
- – How valuable is your home to you emotionally – not financially?
Product Comparison
Since selling your home isn’t really a financial product, you can’t really make an apples to apples comparison.
However, from a financial perspective, let me raise a few things to consider:
- – Selling your home would see you ‘withdraw’ all the equity you currently have – where as a reverse mortgage could eat into that (in 99% of cases it does not).
- – However, you also lose out on future appreciation of your home – it is itself an investment and you are selling that investment and giving up any future returns (house price gains). Often these house price gains are more than the reverse mortgage costs – so you are giving up a profitable investment asset.
- – In addition to this, selling your home is not free and the going commission rate in most of Canada just now is around 5%. So you are giving away 5% of the value of your home off the bat – with no house price growth or anything to offset this loss.
Who Is This A Good Alternative For?
Sometimes people get to a stage where they aren’t physically able to maintain their home – so either downsizing into a condo or renting a condo can be a good idea.
In addition to this, there are a few people who aren’t emotionally attached to their home – or maybe even own 2nd homes (which are not eligible for a reverse mortgage). This would be a good alternative for them.
3. A Regular Mortgage (Or Mortgage Refinance)
The final – but least considered alternative – is a ‘regular’ or traditional mortgage.
Included in this would be a mortgage refinance – where you increase the amount of the mortgage and take out some more equity.
The reason why so few of our clients consider this is that some of them already hold a regular mortgage on their home and they are looking to get rid of it – not consider it as an alternative!
Others spent years paying off the mortgage and the thought of putting it back on there and having to make those monthly payments again sends shivers down their spine.
However, for those who do not have a mortgage already, it is another way to get equity out of your home.
Product Comparison
Many of the points above – regarding a HELOC – apply for a conventional mortgage.
However, it is not quite as flexible as a HELOC. There are a few other considerations for this too:
- – With regards to rate, assuming you have reasonable income and a good credit score, this is going to be the lowest interest rate out of any of the alternatives – lower than both a HELOC and reverse mortgage.
- – The other features of the mortgage are going to be very similar – penalties for early payment and restrictions about how much of the balance you can pay off though.
- – However, this is probably the least flexible of the 3 options. In addition to this, you will be required to make monthly payments and you also need to qualify for it (like a HELOC).
- – A mortgage refinance is also capped to 80% of the property value by law.
- – Finally, you could lose your home for not keeping up with payments – unlike a reverse mortgage where you are secured from losing your home by the legal contract.
Who Is This A Good Alternative For?
The catch with a conventional mortgage is that the people who it is a good alternative for don’t really need it!
That is, if you have steady income, a good credit rating and a low mortgage balance (or zero mortgage balance) then this is a good alternative for you – except that you probably don’t actually need the cash.
The most likely candidate for this is someone who can simply go through a mortgage refinance and take more money out of their home, increasing their mortgage balance in the process.
Of course, this means higher monthly mortgage payments and paying more interest on your mortgage anyway – but for some people this is not a problem and a good alternative.
What About The Pros and Cons?
We have already covered the pros and cons of a reverse mortgage in detail – click here to read our article on this.
In Summary – Reverse Mortgage Alternatives
In this article we summarized the 3 most common alternatives that people consider.
Did we miss anything? If that’s the case, and there is an alternative to a reverse mortgage that you are considering, leave a comment below and we’ll give you a response.
If possible,I would appreciate to receive a copy of your Reverse Mortgage booklet.
Also, please send me the interest rate on this mortgage.
Hi Doug
You can get a copy of the reverse mortgage booklet (our eBook – which is I assume what you meant) at: https://www.reversemortgagepros.ca/reverse-mortgage/
And I try to keep this page updated with the latest interest rates on a reverse mortgage: https://www.reversemortgagepros.ca/rates-and-penalties/
Thanks,
Mich
What about an unsecured Line of Credit?
Hi Chris
An unsecured line of credit is an alternative but it is a very different product to a reverse mortgage and all the products mentioned in this article. I would not call it an ‘alternative’ in that – because it is unsecured – the rates will be much, much higher than either a reverse mortgage, HELOC or ‘normal mortgage’. These are all ‘secured’ loans so are grouped together in this way. An unsecured line of credit is better grouped with a loan, credit card or other types of higher rate unsecured lending.
For more on the rate differences between all these products see my article on reverse mortgage rates at https://www.reversemortgagepros.ca/rates-and-penalties/.
Thanks,
Mich
I have been talking with Julian about a reverse mortgage, during our conversation we agreed that it is actually possible to lose ones house contrary to what you claim. If interests go crazy high like they did in the early 80’s (22%) and if house prices drop dramatically like in the early 90’s. You claim in your statement that (I can never lose my house ever). Julian told me I would have to sell my house in case it became worth less than what I had borrowed. I suppose that would never happen. I guess I’m just looking for that bit of assurance. It seems that property may go down at times but always recover and rises to glory. I guess my concerns are unfounded.
Hi Carl
Julian from our team? Unfortunately, what he said is incorrect for a couple of reasons.
Firstly, you are never required to sell your home to pay off the loan – ever. It doesn’t matter how high interest rates are, a reverse mortgage does not require any payments or you to repay the loan at all (ever).
Secondly, your house can never be worth more than you borrowed, as the reverse mortgage is ‘capped’ at the market value of the home. An extreme example: let’s say you borrow $100,000 and your house is worth $200,000. After 10 years, you now owe $150,000 but there is a big market crash and your house is only worth $140,000. In this case, the cap kicks in and the amount you actually owe is $140,000 (the market value of the home) – you can never owe more than this. But still you are still not required to repay the loan – ever. You could continue holding on to your home for life and house prices might then recover. Otherwise, what would happen would be that when you passed away, your home would either have to be re-mortgaged or sold to recover the money.
It sounds to me that Julian got a reverse mortgage mixed up with mortgage refinance – these are 2 completely different things.
Thanks,
Mich
WHEN IS CAPITAL GAINS BEING APLEYED TO PRINCIPAL RESIDENTS. /////
CAN I GET A REVERSE MORTAGE ON MY RENTAL HOUSE,
Hi Norman,
You would not be able to get a reverse mortgage on a rental property, the property needs to be your primary residence. As far as capital gains, with a reverse mortgage, there are no capital gains implications at all.
Thanks,
Mich
What would happen if the Home Equity Bank went out of business?
Hi David
Interesting question. As a Schedule A bank, they are required to keep capital aside to cover their lending and have a certain percentage of their assets in a near liquid state. So it would depend on the reason for them going out of business – such as if they broke these rules. Otherwise, under these rules and regulations they would have capital available to cover their mortgage lending.
Given that they have billions and billions (potentially trillions) of dollars on their books, I would imagine the Government would intervene in the same way that happened with other large lenders going bankrupt in the past 10 years.
As they are currently one of the fastest growing and most profitable companies in Canada just now, it is certainly not something I would worry about or factor into my decision at all. It has the same likelihood of happening as RBC, BMO, CIBC, Scotiabank or TD going bankrupt – in which case people would lose a lot more than their homes…
Thanks,
Mich
Do modular homes qualify for a reverse Mortgage?
Hi Vic
Yes, modular homes qualify. They would still require an appraisal and to be worth more than $100k though.
Thanks,
Mich
If you have a house worth about $500,000, a mortgage of $100.00, can you get a reverse mortgage, then pay off your mortgage?
Hi Sylvia
Yes, you can get a reverse mortgage but the funds must be used to pay off the existing mortgage first. So let’s say your house was worth $500,000 and you qualified for $200,000 as a reverse mortgage. $100,000 would be used to pay off the existing mortgage and the remaining $100,000 would be yours to use as you like.
Thanks,
Mich
What happens when there is an age difference between the titles owners of the property, for example one is 55 and the other 80? How is the percentage amount available for borrowing calculated?
Hi Rebecca
The youngest person would be the person who would be used to decide how big a percentage you could borrow. In this case, the amount you could borrow would be based upon the age of the person who is 55, as they are youngest. This means that they would not be able to borrow the full 55% – it is very rare for people to qualify for the full 55% below the age of 70.
However, there is the option to remove the person who is 55 from title to the property. This only applies where it is not a ‘matrimonial home’ – that is where the two people are not married. If they are married, there is nothing you can do – qualification will always be based upon the age of the younger person of the couple.
Hope this helps.
Thanks,
Mich
With a reverse mortgage, does a person loose title to their home? What happens with a reverse mortgage when a person is unable to live in the home because of health? Who would sell the home? and what monies would the person receive from the sale?
Example: Home worth $250,000. Reverse mortgage pays $100,000—–a year or two later person becomes handicapped and needs to go into a care facility. What happens if at that time the home is still worth the same amount or it has increased?
Hi Amber
No, the person keeps full title – 100%. This is the same as with any kind of mortgage.
If the person was unable to live there, they would likely have to sell the home (which would make sense if they are not living in it) and can use the funds to pay off the reverse mortgage balance remaining at that point. The person would keep the sale price, less the reverse mortgage balance. 99% of people have a balance left over like this when a reverse mortgage is removed.
In your example, let’s say the house increased in value and was now worth $260,000; the reverse mortgage also increases and is now $110,000. The person would keep $260,000 – $110,000 = $150,000. I would also imagine that they’d still have some of the original $100,000 reverse mortgage cash left over too! So they’d keep $150,000 from the sale + whatever cash they still have left from the original $100,000 reverse mortgage money that they got.
Hope this helps.
Thanks,
Mich
Sorry forgot to say that there is no mortgage- the person has clear title,
My home is worth around $400,000. I have a legal suite downstairs that brings in $1300 a month. I pay utilities for both places and reside upstairs. I owe $70,000. I am 71 years old and have a pension income of $1450 plus the $1300 from suite for total of $2750. What percentage amount would I qualify for please.
Hi Ann
You could qualify for the full 55% ($220,000) – but it would depend on the property location. If you fill in an application, we would be able to advise you better on this.
Thanks,
Mich
Our house and rental condo is in a combined mortgage. The House (primary residence) is valued at 423,500 and the condo 194,000. The combined mortgage balance is 283,701.
How could I setup for a reverse mortgage on my primary residence. Do we have to separate out the two mortgages first.
Appreciate your insights
Hi Siri
You could actually get a ‘blanket reverse mortgage’ to cover both properties. It would have to be enough money to pay off both mortgages – you could then keep anything extra above this.
Hope this helps!
Thanks,
Mich
Hi Mich….. I am 81 years old – condo rich and cash poor. Condo would likely sell for approx. $ 500,000.
I already have a HELOC loan of $ 100.000.00 so my plan would be to get a reverse mortgage of $ 135,000.(that is ALL I want). My monthly interest HELOC payments would stop which would be added to my monthly cash flow. I would pay off the HELOC and use the balance. My concern is….. Do the interest rates escalate? if so, how does it work? For example, say I kept my condo and reverse mortgage until I go to Heaven, can the TOTAL interest rate be calculated when I sign up for the reverse mortgage. Thanks for your answer….
Carol
Hi Carol
I’m not totally sure what you mean. It seems that you definitely understand how it works. You can lock in the interest rate – for at least 5 years. There is no way to calculate the total interest – as the only way to do this would be some prediction of how long you were going to live – which is obviously not possible! Other than that, you will always know what the interest rate is going to be.
Thanks,
Mich
Hi Mitch…… I am asking about COMPOUNDING INTEREST and ANNUAL PERCENTAGE RATE. I would like to know how these two factors escalate the INTEREST paid. Can you please explain how these two factors work? every 6 months? every year? Please give some examples of COMPOUNDING INTEREST.
Would there be a strategy as to when to get in and get out and move? to lessen INTEREST PAID. I hope this is more clear to you…..thanks
Hi Carol
Interest on a reverse mortgage compounds semi-annually (every 6 months) – the same as every other mortgage in Canada. The exception is a Home Equity Line Of Credit (HELOC) – which compounds monthly.
For the APR, see our rates page at https://www.reversemortgagepros.ca/rates-and-penalties/.
Here are a couple of strategies you can use to reduce the interest you pay:
– You can pay the interest every month – effectively turning your reverse mortgage into a Home Equity Line Of Credit. See our article on this at https://www.reversemortgagepros.ca/line-of-credit/
– You can invest the money in stocks, bonds, ETFs or even buy an investment property. Not only does doing this save you interest – by generating income to offset the interest – but it also makes the interest on your reverse mortgage tax deductible.
And of course, the growth in the value of your home will also offset the interest you pay – and in many cases you can increase the equity in your home while holding a reverse mortgage on it. The article I linked to above discussing the rates covers this – as does our free reverse mortgage eBook (if you haven’t already, you can download it at https://www.reversemortgagepros.ca/reverse-mortgage/).
Hope this helps.
Thanks,
Mich
I don’t understand. If the reverse mortgage has to be registered against the principal home, how can it be registered against 2 properties since even a couple is only allowed one principal residence
Hi Ann
Not sure I understand your question – is this the follow up to something you asked somewhere else?
Anyway, you can do what’s called a ‘blanket mortgage’ which covers more than 1 property (up to 3 actually). However, 1 of the 3 properties must be your principal residence. The mortgage would be registered against all 2 as well.
Hope this helps.
Thanks,
Mich