As Canadians approach retirement, they often have a significant portion of their wealth tied up in their homes. Home equity can be an important source of funds for seniors, who may need extra cash to cover living expenses, pay for health care, or travel. In this article, we’ll explore five ways that Canadian seniors can access the equity in their homes.
- Reverse Mortgages
A reverse mortgage is a loan that allows seniors to access the equity in their homes without selling their property. The loan is repaid when the borrower sells the home, moves out, or passes away. To be eligible for a reverse mortgage, the borrower must be at least 55 years old and own their home outright or have a small mortgage.
Pros:
- No monthly payments required
- You can continue to live in your home
- No income or employment verification required
- Funds can be used for any purpose
Cons:
- Fees and interest charges can be high
- Decreases the equity in your home
- May impact your eligibility for government benefits
- Interest and fees are added to the loan balance, which increases over time
- Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is a loan that is secured by your home. The loan allows you to borrow against the equity in your home and repay the loan over time. The interest rate on a HELOC is typically lower than a traditional loan, making it a popular choice for Canadian seniors.
Pros:
- Lower interest rates compared to other types of loans
- Funds can be used for any purpose
- You can access the funds as needed
Cons:
- Your home is used as collateral
- If the value of your home decreases, you may owe more than it is worth
- If you miss payments, your home could be foreclosed on
- The loan balance increases over time, which can increase your debt
- Selling Your Home
Selling your home is one of the most straightforward ways to access the equity in your home. You can use the proceeds from the sale to purchase a smaller home, downsize to a condo, or invest in a rental property.
Pros:
- Provides a lump sum of cash
- No ongoing loan payments
- You can purchase a smaller home that is easier to maintain
Cons:
- You may need to find a new place to live
- The sale of your home may result in capital gains tax
- Selling your home can be emotionally difficult
- Renting Your Home
Renting your home is another option for Canadian seniors looking to access the equity in their homes. You can rent out your home for additional income, which can help cover living expenses or pay for healthcare.
Pros:
- Provides a steady source of income
- No loan payments required
- You can continue to live in your home
Cons:
- You may need to make renovations to your home to make it rentable
- You may need to find a new place to live if you choose to rent out your entire home
- You may need to deal with the hassle of finding and managing tenants
- Downsizing Your Home
Downsizing your home is another option for Canadian seniors looking to access the equity in their homes. By downsizing, you can purchase a smaller, more manageable home that requires less maintenance.
Pros:
- You can purchase a smaller, more manageable home
- Lower maintenance costs
- No loan payments required
Cons:
- You may need to find a new place to live
- You may have to part with belongings and memories associated with your current home
- Moving to a smaller home may impact your sense of community and social connections
Table: Comparison of 5 Ways to Unlock Your Home Equity
| Method | Pros | Cons |
|---|---|---|
| Reverse Mortgages | No monthly payments required, continue to live in home, no income verification needed | High fees and interest, decreases equity, may impact government benefits, interest and fees added to loan balance |
| Home Equity Line of Credit (HELOC) | Lower interest rates, funds can be used for any purpose, access funds as needed | Home is used as collateral, debt increases over time, risk of foreclosure, interest and fees added to loan balance |
| Selling Your Home | Provides a lump sum of cash, no ongoing loan payments, easier to maintain home | Need to find a new place to live, may result in capital gains tax, emotionally difficult |
| Renting Your Home | Provides a steady source of income, no loan payments, continue to live in home | May need to make renovations, may need to find a new place to live, hassle of finding and managing tenants |
| Downsizing Your Home | Smaller, more manageable home, lower maintenance costs, no loan payments | Need to find a new place to live, may need to part with belongings, may impact community and social connections |
Did you know that reverse mortgages were first introduced in Canada in the 1980s? They have become increasingly popular in recent years, with the Canadian Mortgage and Housing Corporation (CMHC) reporting that the number of reverse mortgage borrowers increased by 50% between 2016 and 2018. According to the CMHC, the average reverse mortgage borrower in Canada is 72 years old, and the majority of borrowers use the funds for home renovations, debt repayment, and living expenses.
In 2020, the Canadian government introduced changes to the reverse mortgage program to ensure that seniors would have enough money to maintain their homes and cover their living expenses throughout the term of the loan. Research has shown that downsizing to a smaller home can have a positive impact on seniors’ mental health and well-being, reducing feelings of loneliness and isolation. (Journal of Housing for the Elderly, 2018)
There are many options for Canadian seniors to access the equity in their homes. Each method has its pros and cons, and the best choice for you will depend on your individual financial needs and goals. Before making a decision, it’s important to seek the advice of a financial advisor or mortgage professional to ensure that you understand the potential risks and benefits of each option. Whether you choose to take out a reverse mortgage, open a HELOC, sell your home, rent it out, or downsize, accessing the equity in your home can provide financial security and peace of mind in retirement.