If you’re like most Canadians, your wealth is diversified but your home is a big slice of the pie. That can put you in a tricky position – a big part of your net worth is locked away in your home.

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If you want to access this wealth, you’d have to sell your home, right? Wrong! There are ways you can release equity from your home without selling.

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In this article, we compare two popular options – reverse mortgages and mortgage refinance. By the time you reach the bottom of the page, you’ll be clear about the differences between the two and closer to understanding which is best for unlocking the equity in your home.

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What is a reverse mortgage?

A reverse mortgage lets you access the equity you’ve built up in your home, without having to sell it or move out.

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You’re loaned a tax-free cash payment, secured against your home, but only have to repay the balance when you leave your home. You’re charged interest, which you can optionally pay off each month or leave to accrue on top of your balance.

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It’s a great way to turn your wealth into cash you can use here and now.

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Want to know more? Check out our article explaining everything you need to know about reverse mortgages.

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What is a mortgage refinance?

In the context of unlocking equity, mortgage refinance sees you take out a new, larger mortgage on your property to pay off your existing loan and keep the difference.

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To explain it with an easy example:

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• Your remaining mortgage balance is $50,000
• You refinance with a $100,000 mortgage
• You use $50,000 to pay off your old mortgage and keep the remaining $50,000

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That example is oversimplified and doesn’t account for costs, fees and penalties – but it hopefully helps you see how a mortgage refinance can release some equity from your home.

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The key differences between reverse mortgages and refinancing

A reverse mortgage and a refinance can be used for the same purpose, but they are not the same things.

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If you’re trying to decide between the two, you should be sure about the little and large details that separate them.

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Purpose and usage

As a reverse mortgage lender, we’ve seen them used to consolidate debts and make accessible adaptations to the family home, all the way to giving living inheritances and making dream vacations a reality.

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Homeowners choose to refinance for many reasons, too, but most common are unlocking equity, reducing rates or repayments and consolidating debts.

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Eligibility requirements

To be eligible for a reverse mortgage with Bloom, you must be:

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• Over 55
• Resident in ON, AB or BC
• Borrowing against your principal residence

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To be eligible for a mortgage refinance, you’ll need to meet the lender’s requirements for

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• Income
• Debt-to-Income (DTI) ratio
• Credit history and rating
• Home value
• Loan-to-Value (LTV) of your new mortgage

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Payment structures

You only repay the balance of a reverse mortgage when you leave your home.

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With a mortgage refinance, you will have to make regular monthly repayments.

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There are a few caveats: 

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• When you refinance, you might be able to choose an interest-only repayment structure. You will owe the full balance at the end of your mortgage term – even if you still live in your home.
• You can choose to make interest-only payments on your reverse mortgage, but these can be turned on and off at your discretion.

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Impact on home equity

You sacrifice some of your equity with both a reverse mortgage and a refinance. There’s a big difference in what happens after that initial sacrifice, however.

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With a Bloom reverse mortgage:

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• You can borrow up to 55% of the value of your home
• You will never owe more than your home’s fair market value at repayment

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With a mortgage refinance:

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• You could borrow as much as 80% of your home’s value
• You could end up with negative equity, if your home falls in value

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The advantages and disadvantages of reverse mortgages

Now that we’ve covered the differences, let’s look more closely at the pros and cons of each choice – starting with reverse mortgages.

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We’ve written a fuller guide to the pros and cons of reverse mortgages in Canada, but share a quick overview below.

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Advantages of reverse mortgages

These loans are becoming increasingly popular in Canada. When you look at the range of advantages associated with them, you can see why.

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Supplemental income

A tax-free cash payment can really boost your income – either in the short-term or spread out over several years. This could help you live a higher quality lifestyle in retirement.

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No monthly mortgage payments

You might be borrowing a large sum of money, but you have no obligations to make monthly repayments. You can always choose to make payments against the interest you’re accruing, but these are entirely optional.

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Tax-free funds

Your reverse mortgage funds are completely tax-free. Every cent you borrow is yours – the only exclusion being that we take your closing costs from your loan amount.

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Flexible disbursement options

You can choose to receive a lump sum payment or use a Bloom Home Equity Prepaid Mastercard® – a flexible credit facility, secured against your home. You can use a Bloom Card to draw down against your home equity as and when you need it, rather than taking a one-time payment.

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Home ownership retained

You still own and live in your home with a reverse mortgage. You don’t need to move out, keep up monthly payments or  worry about anything else.

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When it comes to selling your home, you’ll repay the loan and interest (capped at the fair market value of your home) and keep whatever is left – including any appreciation.

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Disadvantages of reverse mortgages

We might sell reverse mortgages, but we’ll never pretend they’re perfect or the best choice for every situation. If you’re worried about the following issues, you might want to consider other options.

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Impact on inheritance

For a lot of seniors in Canada, a significant proportion of their wealth is tied up in their home. When they pass, the sale of their home unlocks the money they’ve bequeathed.

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Your estate has to repay its debts before it can pay out any inheritance. Your reverse mortgage will need to be paid off before the remaining equity can be gifted.

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Of course, if you use your loan to pay out a living inheritance, this is not so much of an issue.

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Potential for foreclosure

Your home acts as a guarantee for the loan – if you can’t meet the requirements of your loan, you risk losing your home.

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Luckily, these are fairly simple. You must keep your home in good repair and keep paying taxes and insurance.

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Eligibility requirements

You have to be over 55 to get a reverse mortgage with Bloom. You also need to be in Ontario, British Columbia or Alberta. You can only take out a reverse mortgage on your principal residence (i.e. not a home you rent out to others).

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If you don’t meet these criteria, you won’t be able to get a reverse mortgage.

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The advantages and disadvantages of mortgage refinance

There’s a reason that mortgage refinancing is a popular way to borrow money in Canada, but there are risks and issues you should be aware of before jumping into this serious financial commitment.

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Advantages of refinancing

As mentioned, refinancing is hugely popular. For homeowners, it can deliver multiple benefits, which goes some way to explaining why it’s such a common way to borrow money.

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Lower interest rates

Refinancing your mortgage to a lower rate will save you money every month. You could even stand to benefit twice:

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1. If your new mortgage has a lower rate than your old one
2. If you’re borrowing a smaller percentage of your home’s value, you might have access to lower rates than before

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Reduced monthly payments

A lower rate means smaller payments – you should have more of your cash available to spend elsewhere after refinancing.

Shorter loan terms

If you’re planning for the future, you might want to know your debts will be cleared sooner. A shorter term means you could also pay less in interest over the lifetime of the loan.

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Access to home equity

The big draw of a refinance is that it can release some of the equity you’ve built up in your home. You could have a major cash injection to use for whatever you want or need.

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Disadvantages of refinancing

Borrowing money always comes with risks, so you should be clear about the challenges that can come with a refinance.

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Closing costs

The upfront costs of a mortgage are higher than many other loans. The legal complexities lead to higher costs than a personal loan or credit card, for example.

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You can expect the closing costs of refinancing to be anywhere between 2% and 5% of the total cost of your loan.

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Extended loan term

If you only have a few years left on your existing mortgage, you might go from the brink of being debt-free to having a much longer period of repayments.

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Credit requirements

A refinance is still a mortgage like any other – your lender needs to know you’re a safe and reliable person to lend money to. Your credit score and history will need to be good enough to satisfy the lender.

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Time consuming process

If it’s been a while since you last took out a mortgage, the shopping around, application process and back-and-forth with lawyers takes up more time than you might remember.

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If you’re looking for a quick cash payment, refinancing isn’t likely to be your best choice.

Risk of foreclosure

If you can’t make your repayments and default on your loan, your lender can foreclose your home. The risk is real, even if rare – the Canadian Bankers Association reports 0.19% of Canadian mortgages are in arrears (as at May 2024) – just under 10,000 in total.

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The risk is much greater than with a reverse mortgage.

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Income requirements

Your lender needs to know you can afford the repayments you’re signing up for. If you’re on a low income, the amount you can borrow might be restricted.

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Who is a reverse mortgage best for?

Your situation is going to be unique, but if you identify with any of the following profiles, you might be a great fit for a reverse mortgage:

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• You’re in, or about to enter, retirement
• You’re over 55
• You have a significant amount of equity in your home
• You want to stay as the owner and occupier of your home
• You want to be free from monthly repayments
• You’re comfortable to sacrifice some of the final sale price of your home after you leave

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Who is a mortgage refinance best for?

If you fit one or more of the descriptions below, you might be a good candidate for a mortgage refinance.

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• You’ve got a good, steady monthly income
• You’re a little way out from retirement
• You can afford to make monthly repayments for the lifetime of a new mortgage
• You have an average or better credit score
• You’re happy to give up some equity in your home for now
• You can afford to take on more debt

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Two strong options for borrowing against your home 

Both of the options we’ve looked at in this article are good ways of borrowing money, using your home as a security.

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Neither is intrinsically better than the other, it really comes down to your personal situation and what suits your finances at this moment in time. If we’ve done our job, you should now feel clearer on which one might be best for you.

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And if you’ve decided that a reverse mortgage is your preference, you can get an estimate from Bloom by answering just four questions now.

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