A Reverse Mortgage In Your Pocket: Risky or Practical?

Exchanging hard-earned home equity for short-term liquidity requires some thought. That’s especially true with a reverse mortgage, where the equity you cash in could be gone forever.

But what happens to that careful contemplation when accessing home equity is as simple as swiping a credit card?

That’s the question I’ve had since reverse mortgage provider Bloom Finance Corporation launched the Bloom Prepaid MasterCard in March 2024. It’s an innovative tool, but is having such easy access to home equity the right choice for cash-strapped homeowners?

Let’s find out.

How the Bloom Prepaid Mastercard works

In many ways, the card operates like a typical reverse mortgage.

Bloom determines the amount of money they’re willing to lend you based on your age, the amount of home equity you have and the location of the house being mortgaged. (Only Ontario, Alberta and B.C. homeowners are eligible for now). The money borrowed, plus interest, is paid back when you sell your home or pass away. You can pay the balance earlier if you have the cash available and are willing to incur the prepayment fees.

Withdrawing funds is where the card carves a new path. With a typical reverse mortgage, you might receive a large lump-sum payment you can draw from whenever you want. With the Bloom Prepaid MasterCard, you can choose how much equity will be loaded onto the prepaid card each month. You can spend those funds anywhere that accepts the card.

According to Bloom founder and CEO Ben McCabe, the company’s ideal scenario is to have borrowers make their reverse mortgage funds last up to 10 years by drawing up to $2,000 per month.

Primary benefit: Control

The most intriguing aspect of the Bloom card might be how much control it gives borrowers.

“The beauty of the product is that it is not mandatory to draw on the card,” says Shane Hussain, principal broker at HVR Financial.

Unlike a typical reverse mortgage, which accrues interest the moment a lump-sum payment is made, Bloom only charges interest on the equity withdrawn. If you don’t use your card, you won’t owe Bloom anything. Though, at this point, you will have already paid $2,300 in administrative fees to set up your card. (Note this was Bloom’s administrative fee amount at the time of writing.)

This flexibility is missing in a reverse mortgage, where you might take out more than you need, not use it, but still pay interest on the entire amount.

Biggest concern: Overspending

At a time when inflation is driving increased credit usage, it’s fair to wonder if easier access to home equity is really what Canadians need.

I was happy to find out that the card has some guardrails to prevent overspending. It can’t be used at casinos, for instance.

And even though borrowers can request a monthly spending limit increase, they’ll have to consult Bloom to do so. This step should reduce the likelihood of any impulsive behaviour.

“If it were just a lump sum advance, which is the way reverse mortgage funds are traditionally delivered, that would just go into a bank account and there’d be no structure around that spending,” McCabe says.

Don’t forget the interest

Bloom’s home equity card has some advantages compared to a typical reverse mortgage, but it should also be compared to other financing options, like credit cards.

The rates Bloom charges on home equity draws are far lower than what you’d encounter using most credit cards. At the time of writing, Bloom’s rates ranged from a 6.94% promotional five-year fixed rate to 8.39% for a promotional one-year fixed rate.

You can’t, however, simply pay off your Bloom card like you can with a credit card. You can pay off the interest that accrues on your withdrawals, but you can’t pay down the balance without encountering prepayment fees.

McCabe says prepayment fees on the Bloom card are approximately 4% in the first year, but decrease to three months’ interest in later years and disappear completely after year 10.

“Funds are going out to clients and we don’t know when they’re coming back, right? They can come back within five years, 10 years, 40 years. You’re locking in certain funding structures for the long term, and as a result, prepayment fees are kind of a necessary evil,” McCabe says.

The Bloom card isn’t designed for people with the financial flexibility to pay off their credit card balance each month anyway.

“This really is meant to be a long-term sort of purchasing power supplement for folks who are house rich and cash constrained in retirement,” McCabe says.

Final thoughts

I’m a lot more at ease with the Bloom Prepaid Mastercard than I was before. Card users can still blow through their monthly spending limits. Going beyond those limits, however, is far from automatic, and isn’t likely to lead to chronic overspending.

And when it comes to the optimal use of home equity, the onus isn’t on the product being used, it’s on homeowners themselves.

“Ultimately, the money belongs to them,” Hussain says. “The equity is in their home, and they’re the ones who have to take responsibility for how they utilize it.”

Whether or not Bloom’s card is the solution for a golden years liquidity crunch, it provides something you don’t often encounter in Canada’s limited reverse mortgage market: choice and control.