A HELOC or Reverse Mortgage - What's the Difference?
Wednesday Mar 04th, 2020
A Heloc is a home equity line of credit. You can borrow money whenever you want, up to the credit limit using regular banking methods. This line of credit is secured by your home.
You can apply for a HELOC at most banks or credit unions.
You are required to pay the minimum interest payment on the amount withdrawn every month.
The interest rate is variable based on the lender’s prime interest rate plus a percentage.
Ex: a home equity line of credit can have an interest rate of prime plus 1 or 2 percent. If the lender’s prime interest rate is 2.85%, then your home equity line of credit would have an interest rate of 3.85% (2.85% + 1%).1
This added amount may be negotiable.
A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. You may be able to borrow up to a certain percentage of the current value of your home. The maximum amount you will be able to borrow will depend on your age, your home’s appraised value and your lender.2
You don’t need to make any payments on a reverse mortgage until the loan is due. This is usually when you move out of your home, sell it or the last borrower dies. You will owe more interest on a reverse mortgage the longer you go without making payments. This may result in your having less equity in your home.2
The reverse mortgage interest rate and the closing and administrative cost are added together to determine the annual percentage rate, known as the “APR”. The APR is calculated by determining what the total interest cost would be over a five-year period, then adding the closing fee, and turning that total cost into an annual rate.
The interest is compounded - the interest amount is added to the principal, or in other words, interest on interest. The equity in your home may go down as the interest adds up. 1
Reverse mortgages are available through 2 financial institutions:
- Home Equity Bank offers the Canadian Home Income Plan (CHIP), which is available across Canada directly from Home Equity Bank or through mortgage brokers.
- Equitable Bank offers the PATH Home Plan, which is available through mortgage brokers in Alberta, British Columbia and Ontario.2
|No need to sell your home|
|You don't have to pay tax on the money borrowed.|
|This money does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting.|
|You don't have to make any regular loan payments.1||You are required to pay a monthly interest on the amount withdrawn.|
There may be limitation as to when and how you can withdraw money.
Easy access to available credit2
Interest rates are higher than most other types of mortgages1
Often lower interest rates than other types of credit
|Interest rates are set when a term is chosen.
ex: 1, 3 or 5 year term (A new loan can be negotiated at the end of the term repeating the process)
|Variable interest rates can change which could increase your monthly interest payments.2|
The interest is compounded.
You only pay interest on the amount you borrow.2
|Closing and administration costs may be higher.
Costs are added to the amount borrowed (principal).
|Fees are charged to set up the HELOC at the begining only.|
|A prepayment penalty is charged if you pay off your reverse mortgage before it is due.||
You can pay back the money you borrow at any time without a prepayment penalty.
|If the signing spouse dies, the borrowed money will need to be paid off, unless both members applied together. The time needed to settle an estate may be longer than the time allowed to repay a reverse mortgage. This may cause difficulties for family.||
The following apply to any bank loan:
-Your lender can take possession of your home if you miss payments.2
-Your lender can reduce your credit limit at any time.2
-Your lender has the right to demand that you pay the full amount at any time.