It’s an acknowledged fact that the cost of living has been on a steady upward trend for the past several years. Making that trend even more problematic is the reality that such cost increases have been greatest in areas where eliminating or cutting back on expenditures is hardest. Food prices, especially, have increased significantly. According to Statistics Canada’s research, “as of July 2025, Canadians were paying 27.1% more for food purchased from stores than they were in July 2020”.
When prices for non-discretionary spending items increase in that way it’s noticed by everyone, but has a disproportionate impact on those who are living on a fixed income and who must, therefore, spend an ever-increasing percentage of that income on such non-discretionary spending. While such individuals and families can be found in all age groups, retirees make up the largest Canadian demographic who live on such fixed incomes.
For many Canadian retirees, benefits received from the Canada Pension Plan (CPP) and Old Age Security (OAS) programs make up a substantial portion of their annual income. And while both CPP and OAS payment amounts are indexed to inflation, that indexation is based on the overall or general rate of inflation. Where the cost of necessities, like groceries, increase much more than the general rate of inflation, the indexing of CPP and OAS benefit amounts just doesn’t keep up with those changes, creating a cash flow shortfall for many retirees.
It must seem to Canadian retirees that there just aren’t many good options when it comes to generating the cash flow needed to cover ever-increasing costs for non-discretionary expenditures. Fortunately, however, the roughly 75% of Canadians over the age of 60 who own their own homes (based on Statistics Canada’s figures for 2021) do have options. Canadians who are now in retirement and own their homes most likely purchased those homes many years or even decades ago and have, consequently, built up significant equity. In the current economic circumstances, that equity has made them house-rich and cash-poor. And that equity can now provide an ongoing source of retirement income – through a reverse mortgage or a home equity line of credit (HELOC). Both such financial products have the same basic structure, which is to allow homeowners to borrow against the value of the equity which they have in their home. In both cases there will be costs associated with taking out a HELOC or reverse mortgage which must be borne by the homeowner, including appraisal costs and other administrative fees. There are, however, definite differences between a HELOC and a reverse mortgage, in terms of costs and benefits, and an individual homeowner’s circumstances will determine which such product (if either) makes the most sense for them.
The home equity line of credit, as the name implies, is a line of credit which permits the homeowner to borrow up to a pre-set limit, based on the current market value of their home. Such borrowings can be in any amount (to a maximum of 65% of the value of the home) and can be made at any time and for any purpose. Typically, the interest rate charged on a HELOC is a variable rate – usually one half or one percent more than the prime rate used by the lender. There is, however, a significant feature of the HELOC of which potential borrowers must be aware. While there is generally no obligation to repay amounts borrowed from a HELOC until either the death of the homeowner or until the house is sold, borrowers are required to pay interest each month on the total amount borrowed.
Take, for example, a couple who own a house currently valued at $750,000. Assume that the couple obtains a HELOC based on that home value and borrows $1,000 each month ($12,000 annually) from the HELOC to help meet current cash flow shortfalls. At an interest rate of 5.70%, they will be obliged to make an interest payment of approximately $57 per month on that $12,000 borrowing. As the amount of HELOC indebtedness increases over time, or the interest rate charged goes up, the amount of those required monthly interest payment obligations will, of course, also increase.
The other major option open to homeowners is the reverse mortgage. Most Canadian homeowners will be familiar with at least the concept of a reverse mortgage, as those products have been heavily advertised in Canadian media. Like a HELOC, a reverse mortgage allows homeowners to borrow based on the market value of their property – up to 55% of the home’s market value. A reverse mortgage is also similar to a HELOC in that borrowers can borrow a lump-sum amount, or can opt to structure the reverse mortgage as a series of payments which will provide a regular income stream, or some combination of the two. And, as with a HELOC, no repayment of the funds advanced under a reverse mortgage is required until the death of the homeowner, or until they leave or sell the home.
The basic advantage of a reverse mortgage over a HELOC is that the homeowner is not required to make any payments of interest amounts charged. However, homeowners need to consider the impact that advantage can have over time. Once the reverse mortgage is taken out, interest (usually at a rate higher than would be charged for a HELOC) will, of course, be levied on all amounts borrowed, and will accumulate from the time the funds are first advanced. Total interest costs can add up very quickly and reach significant amounts by the time the debt is eventually to be repaid, usually out of the proceeds from the sale of the house. And, of course, every dollar of funds advanced and interest levied reduces the amount of equity which the homeowner has built up, on a dollar-for-dollar basis. By contrast, with a HELOC, where accrued interest charges must be paid monthly, the amount of debt (and consequent reduction in equity) will never be greater than the principal amount borrowed. Finally, under the terms of many reverse mortgages, a prepayment penalty is levied where the homeowner moves or sells the house within a few years of obtaining the reverse mortgage – the exact time frame will depend on terms provided by the particular lender. With a HELOC, however, repayment of the outstanding balance can be made in part or in full at any time, without penalty.
As is almost always the case with financial issues, there is no one right answer or even a one-size-fits-all answer, as the “correct” answer is always based on the particular financial and life circumstances of the individuals involved. Help in making that decision can be found in a very comprehensive summary of the features of HELOCs and reverse mortgages – including a listing of the benefits and downsides of each option – which is available on the website of the Financial Consumer Agency of Canada at https://www.canada.ca/en/financial-consumer-agency/services/mortgages/borrow-home-equity.html.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
