What are the alternatives to a reverse mortgage in Canada?
The most common alternatives are (1) selling the home, (2) downsizing, (3) trying to take out a conventional mortgage or a line of credit, or (4) taking out a private mortgage, a home equity loan. Let's look at each.
Firstly, in a 2018 survey, 90% of Canadian retirees did not want to move or downsize.
Secondly, conventional mortgages and lines of credit both have ever-increasing income requirements, which means most Canadians aged 55 and older won't qualify. (It's hard enough now for fully-employed Canadians to qualify for a conventional mortgage.) Moreover, conventional mortgages and lines of credit require monthly payments.
Lastly, private mortgages and home equity loans have high fees and high interest rates that are unsustainable for most people (even wealthy people) on fixed incomes.
With the exception of reverse mortgages, all other home loan and mortgage products put the homeowner in danger of foreclosure and eviction. Reverse mortgages will never require the homeowner to leave the home.
How is a reverse mortgage different from a home equity line of credit (HELOC)?
They are completely different products. A home equity line of credit (HELOC) is a short-term borrowing option for people who can pay the interest and loan in the near future. A HELOC requires the homeowner to make regular payments. Moreover, to get a HELOC in the first place, the homeowner has to qualify based on income, credit history, and so on.
It's very important to remember as well, a HELOC is a demand loan (a "callable loan"), which means the lenders of the HELOC can require payment in full for any reason, at any time, at their discretion. This means HELOCs (and all mortgage types except for reverse mortgages) carry significant risks of non-renewal or cancellation by the lender. They carry the risk that requires the homeowner to re-qualify during the life of the loan, something that might not be possible if anything about the home, the borrowers, the real estate market, the economy, etc. has changed.
None of these features apply to reverse mortgages. Unlike all other mortgage types, reverse mortgages are designed to protect homeowners aged 55 and older by offering them financial security and control. A reverse mortgage is a long-term financial solution. The cash from a reverse mortgage allows homeowners to prolong their retirement savings well beyond the possibilities offered by any other mortgage type.
Is downsizing better than getting a reverse mortgage?
Downsizing is an option but most people underestimate the expenses, underestimate the time required to do it, and they underestimate how drastically it changes their lifestyles.
Because home prices are currently so high in Canada, downsizing usually means at least 2 things: (1) moving into a smaller home, and (2) moving to different neighbourhood, city, or even province.
Most Canadians don't want to leave the neighbourhoods they love. Often they downsize to free up money for retirement, but the extra cash is often gone sooner than they expect. Expenses often add up with renovations, unexpected costs, commissions paid to real estate brokers, legal fees paid to lawyers, and then there's the land transfer taxes.
A reverse mortgage is a much more controllable, predictable way for homeowners to secure funds after they reach 55 years of age.