If you don’t qualify for a conventional mortgage, you might still be able to access the cash in your home through a HELOC, which is a line of credit that’s secured by the equity in your home. Owners must hold at least 20% equity to be eligible, and can typically borrow up to 65% of the market value of the home.
As with conventional mortgages, lenders will check your income, debt and credit score, and may also use the stress test to determine borrowing eligibility. Interest rates on HELOCs tend to be higher than conventional mortgages, but lower than unsecured lines of credit.
The main benefit of a HELOC is that it allows you to borrow money on an as-needed basis (up to a set amount that you negotiate with your lender) and pay monthly interest only on the amount you’ve borrowed. There is no schedule of payments on the principal—you pay off the loan when it’s convenient for you—but you must make your interest payments on time or you risk losing your home.
Similar to a conventional mortgage, a HELOC is best-suited to homeowners who have enough disposable income to make the regular interest payments, as well as pay back the principal on their own schedule.
Canadians who are at least 55 years of age and who live in urban centres in British Columbia, Alberta, Ontario and Quebec may be eligible to take out a reverse mortgage on their primary residence. While there are no income requirements to qualify for a reverse mortgage, the market value of the property must be over a certain threshold. (Equitable Bank, for example, one of the two financial institutions that offers reverse mortgages in Canada, requires a home be appraised at $250,000 or more to qualify.)
A reverse mortgage provides you with either a lump sum or regular cash payments worth up to 55% of the market value of your home, and charges monthly interest on the amount borrowed.
Unlike a conventional mortgage or HELOC, however, you don’t have to make any payments—neither interest nor principal—until the mortgage becomes due (see chart above). That means, provided you meet mortgage obligations (for example, maintaining adequate insurance coverage and other details outlined in the contract) there is no risk of losing your home, and the lender guarantees you will never owe more than the property is worth.
Because no payments are required for as long as you live in the home, reverse mortgages might be a good option for those with limited cash flow and who plan to stay in the home until they die. It’s important to note that the loan amount and accruing interest must be paid eventually—either from the proceeds of the home sale or from the estate—so there may not be much equity left in the home to pass on to your heirs.