Find out why a reverse mortgage is a better way to access the equity in your home
This article was provided by HomeEquity Bank.
You may have heard of a Home Equity Line of Credit (HELOC), but how does it stack up against a reverse mortgage?
Canadians aged 55+ living on a fixed income find it challenging to meet their retirement income needs. Much of this is due to the current high inflation environment. As such, clients may find it difficult to access the cashflow needed to live their desired lifestyle.
Considering that homeownership represents the most significant investment for individuals, with nearly 70% of Canadians owning their homes, according to RE/MAX, tapping into home equity enables clients to utilize their homes to fulfill their financial needs and remain in the home they love without the need to downsize.
A choice for your clients
There are two popular options for clients who want to stay in their homes: a HELOC and a reverse mortgage.
A HELOC typically allows homeowners to access up to 65% of the value of their home. Clients can borrow money as they need – up to an agreed-upon amount – and are only required to make minimum monthly interest payments on the amount that they take out. Unlike a mortgage, there are no scheduled payments on the loan’s principal. Borrowers can pay off the line of credit when convenient for them. Rates are typically lower than for other lines of credit because the loan is secured by your client’s home.
The other option is a reverse mortgage.
The CHIP Reverse Mortgage by HomeEquity Bank allows Canadian homeowners aged 55+ to access up to 55% of their home’s value in tax-free cash without having to move or sell. The best part is that there are no required monthly mortgage payments while your clients live in their homes.
The full amount only becomes due when they move or sell their home or through their estate if they pass away. Homeowners can receive funds in a lump sum or regular monthly deposits. They can use the cash for any financial needs, including health care costs, home renovations, debt consolidation or lifestyle expenses.
Rene Quercia, SVP, Broker Channel at HomeEquity Bank, says, “Reverse mortgages offer distinct advantages over HELOCs, providing financial freedom and security for Canadian homeowners aged 55 and above. Simplified underwriting and no need to re-qualify make reverse mortgages accessible for those on a fixed income.”
Benefits of a HELOC
A HELOC is a revolving line of credit. That means once your clients are approved for the client of credit, they can access cash as needed. Plus, they don’t have to start making interest payments until they withdraw money from their line of credit acount.
When your client starts to pay down the principal amount, the amount of cash you can borrow from a HELOC increases to your original credit limit, providing continued access to cashflow.
Turn of events
Previously, one of the biggest advantages of a HELOC, compared to a reverse mortgage, was that it had a lower interest rate. At the end of 2022, the average HELOC rate was about 2% less than the average CHIP Reverse Mortgage rate. However, the gap between the two rates has slimmed.
Benefits of a reverse mortgage
The CHIP Reverse Mortgage has the following benefits:
- Simplified underwriting. HomeEquity Bank’s reverse mortgage products are designed for Canadians aged 55+, who live on a fixed income, and may have difficulty qualifying for a traditional HELOC.
- No need to re-qualify. A regular HELOC from a bank may subject the borrower to continuous credit score checks and reviews over time, which may impact access to their HELOCs.
- The death of a spouse does not impact the CHIP Reverse Mortgage. With a HELOC, however, this event may trigger the banks to review the credit score of the surviving spouse.
- There is no monthly mortgage payment with the CHIP Reverse Mortgage. A HELOC requires monthly interest and/or principal payments that may be roughly 3% of the amount owing.
- Fixed-term rate options and can be locked in for up to a five-year term. The prime lending rate of a HELOC will float, as it is connected to the Bank of Canada’s prime rate. In a rising interest rate environment, this will increase the borrowing cost.
“The locked 5-year rate of a reverse mortgage ensures stability, while the floating prime lending rate of a HELOC exposes borrowers to rising interest costs”, says Rene.
For more information on how the CHIP Reverse Mortgage can help your clients aged 55+, visit us online at chipadvisor.ca or contact a HomeEquity Bank business development manager today.
