Retirement Planning and Your Mortgage: HELOC vs. Reverse Mortgage
A Home Equity Line of Credit (HELOC) and a Reverse Mortgage both allow you to access the equity in your home, but they work very differently. A HELOC is typically best suited for homeowners who are still working, as it requires income and good credit to qualify. It gives you access to funds as needed (up to 65% of your home's value), and you only pay interest on what you use. However, once you retire, qualifying for a HELOC can be difficult because your income is reduced—and you’re still required to make monthly interest payments on any balance.
As retirement approaches, one of the most powerful financial tools you have is your home equity. Whether you're looking to supplement your income, cover unexpected expenses, or maintain your lifestyle, it's important to understand your options—particularly the difference between a Home Equity Line of Credit (HELOC) and a Reverse Mortgage.
Why Plan Ahead?
One of the best strategies I recommend is setting up a HELOC before you retire. Because HELOC qualification is based on income, you'll be eligible for a much larger credit limit while you're still working. You can secure up to 65% of your home's value, and the best part? You don’t pay interest until you actually use the funds. This creates a flexible financial cushion you can tap into later—years down the road, if needed.
But What If You’re Already Retired?
If you’ve already left the workforce or your income has significantly decreased, qualifying for a HELOC becomes more difficult. That’s where a Reverse Mortgage may be a better fit.
HELOC vs. Reverse Mortgage: What’s the Difference?
A HELOC is typically best suited for homeowners who are still working, as it requires income and good credit to qualify. It gives you access to funds as needed (up to 65% of your home's value), and you only pay interest on what you use. However, once you retire, qualifying for a HELOC can be difficult because your income is reduced—and you’re still required to make monthly interest payments on any balance on most HELOC products.
A Reverse Mortgage, on the other hand, is designed specifically for retirees. Instead of qualifying based on income, lenders look at your age, the value of your home, and where it’s located. You can take the funds as a lump sum, regular monthly payments, or a mix of both—and there are no monthly payments required. The interest is added to the loan and repaid only when you sell the home. Plus, the money you receive isn’t taxable and doesn’t affect your government benefits. It’s a great solution for those who have home equity and wish to increase their cash flow or take out a lump sum to use at their discretion.
A Real-Life Scenario
Jim (67) and Susan (65) were mortgage-free homeowners in Winnipeg Manitoba, with a home valued at $330,000. With no workplace pensions, they relied on CPP/OAS and investment savings to get them through retirement.
Because they were already retired, a HELOC wasn’t a viable option as they no longer met income requirements. Instead, we explored a reverse mortgage. They qualified for $144,500 based on their home value, location and their ages. They set aside $20,000 for home repairs and used the remainder to set up $1,000/month in tax-free annuity payments—lasting just over 10 years.
At an estimated 3% annual home appreciation, their house would be worth around $456,000 in 10 years. After repaying the reverse mortgage (including interest), they would still retain over $200,000 in equity—all without ever making a monthly payment.
Key Takeaway
A HELOC is a smart move before retirement. But if you're already retired or can’t qualify for traditional credit, a reverse mortgage can offer a practical, lower-stress way to access your home equity.
No matter where you are in your retirement planning journey, it's worth reviewing your options. Your home could be the key to a more comfortable and confident retirement.