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Is Using Home Equity for Retirement a Good Idea?

Most Canadians are looking forward to the day they retire and no longer have to go to work. If you have a good pension, substantial savings, strong investments, and a mortgage-free home, retirement and your golden years will be relaxing.

Most Canadians can’t check off all those options. In fact, a whopping 32% of Canadians between 45 and 64 years of age have nothing saved for retirement.1 Of those that are saving, 53% don’t know if they’re saving enough.

There is no cookie cutter approach to figuring out how much you’ll need for retirement, but thanks to rising home prices, if your mortgage is paid off or almost paid off, there are some options to help make your golden years comfortable.

Keep in mind, tapping into home equity to help support your retirement is easier said than done. That’s because you still need to live somewhere when you’re retired. You can’t cash out of your property and tap all the home equity.

Below you can read about how a second mortgage, reverse mortgage, and home equity line of credit (HELOC) can help you lead a more comfortable retirement.

Second Mortgage

One way to tap into the equity you’ve built up in your home in Toronto is with a second mortgage. With a second mortgage, you take out an additional loan on your property. Just like the first mortgage, a second mortgage is secured against the property.

How much your second mortgage will be depends on how much equity you’ve built up in the property. And who you get the second mortgage from. Canada’s big banks want to see you’ve built up at least 25% equity in your home. A trust company will want to see equity of between 10% and 15%.

A private lender though has a lot more flexibility—you can have less than 10% equity built up in your home.

After being approved, you receive a one-time, lump sum payment that you make monthly payments on until it is repaid.

Advantages

There are a lot of advantages to using a second mortgage to help fund your retirement.

• You can tap up to 80% of your appraised home value, minus the balance on the first mortgage.
• You don’t have to cancel your first mortgage and pay penalties and fees.
• Many second mortgages are interest-only payments and one-year terms
• Any homeowner with a primary mortgage can apply for a second mortgage

Disadvantages

The downside to a second mortgage is that you will pay higher interest rates than on the first mortgage. That’s because there is more risk associated with a second mortgage. If the homeowner defaults on their payment, the lender of the first mortgage is paid out first. There is a chance the lender of the second mortgage might not get paid out in full.
The other downside is that you have to make a monthly payment. That’s not something someone in retirement may want to worry about.

Reverse Mortgage

If you are a Canadian homeowner above 55 years of age and are concerned about monthly payments, a reverse mortgage is an effective home equity option. Like a second mortgage, a loan is secured against the equity built up in the home.

Advantages

• No monthly payments until the homeowner moves or sells
• Receive up to 55% of the home’s value
• Interest accumulates monthly but the total amount you owe is capped at the home’s value

Disadvantages

• Reverse mortgages can be expensive: application fees, home appraisal fees, lawyer fees, which is deducted from the amount you receive from the reverse mortgage
• Higher interest rates
• Maximum you can receive is 55%; the actual amount depends on a number of factors
• Can make repayments but may be hit with large penalties if you do
• You’re still responsible for property taxes, homeowner’s insurance, and upkeep of your home.

Home Equity Line of Credit

Rising home prices have made a HELOC in Toronto a very popular option for those nearing or in retirement. A HELOC, like a second mortgage and reverse mortgage, is secured against the equity you’ve built up in your property. But unlike the other two options, a HELOC operates like a credit card or revolving line of credit.

Through a HELCO you can borrow up to 65% of the purchase price or value of the home. Money is deposited into an account and you can use as little or as much as you like. You only need to pay the interest on what you use.

Advantages

• Access to money when you need it
• Pay interest only on money that’s withdrawn
• Lower interest rates because home is used as collateral
• Lower minimum payments provide access to more cash flow
• Depending on how the money is used, it may be tax-deductible

Disadvantages

• Have to make monthly payments
• Interest rates can increase (or decrease), which impacts your ability to pay down debt

Canadalend.com, Helping You Secure a Second Mortgage

Study after study confirms that the majority of Canadians are not financially prepared for retirement. If you own a home or have enough equity built up in your property, a HELOC, reverse mortgage, and second mortgage can help boost your retirement income.

To fully understand the differences and discover which one is best suited to your retirement needs, contact the home mortgage professionals at Canadalend.com.
How can Canadalend.com give you better options than traditional lenders and other private lenders? The licensed home mortgage lenders at Canadalend.com are independent. Where the big banks only push their own products and services, even if they’re not what you’re looking for, Canadalend.com has access to hundreds of different private lenders. Many specialize in helping homeowners nearing retirement tap the equity in their home, even if they have bad or no credit, are self-employed, or have unreliable income.

To find out what your best equity option for retirement is, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

Sources:

1. “32% of Canadians are nearing retirement without any savings: Poll,” Bloomberg, February 8, 2018; https://www.bnnbloomberg.ca/32-of-canadians-are-nearing-retirement-without-any-savings-poll-1.991680.

Buying a home is a complicated process that involves banks, real estate agents, lawyers and a ton of moving parts. The very first step a buyer should take is to get pre-qualified for a mortgage. It’s not a necessity but it helps remove murkiness and confirms that people can borrow funds to buy a home, and how much they will have to work with. It will save you time and possibly heartbreak as you search for your first or next home.

It’s a simple process and qualification is based on your financial profile. Here are some tips to help you get pre-qualified.

Credit Report

A credit report is a snapshot of a borrower’s credit history. It outlines their debt history and their ability to repay loans. It is a vital document for lenders to review as they make their decision.

Typically, you need to provide a credit report as part of your pre-qualification application. If you have a poor score, consider holding off for a few months as you work towards improving it. During this time, focus on paying off debts, pay incoming bills on time, and don’t borrow any money.

You can also meet with a credit counselor to create a strategy to improve your score.

Your Financial Information

Pre-qualification doesn’t require you to submit all your documentation but you need to have your numbers in order. Numbers refer to your financial information, which can include household income, assets, liabilities, down payment amount, bank statement and the previously mentioned credit score.

Before contacting your lender to start the pre-qualification process, consult with your bank to get your financial information in order.

Be Honest and Transparent

To get pre-qualified, a lender needs to assess your financial situation and history. To do so, you need to provide accurate information. Under no circumstance should you try to conceal a debt or lie about your credit score. Not only will a lie on your application result in rejection, it could put you in bad standing with the lender.

Contact us today to learn more about mortgage pre-qualification, or to start the process.

When applying for a mortgage, one of the most pressing decisions a borrower must make is with respect to the interest rate. Should you lock into a fixed rate? Should you take a chance on a variable rate? These are important questions that need answers so that the homeowner doesn’t find themselves saddled with a mortgage they can’t afford because the rate increased.

Knowing what can cause the interest rate to change can help you make the right decision. This knowledge can help you predict how the interest rate might fluctuate over the duration of your mortgage, and ultimately, prepare for any changes.

The Health of the Market

It’s normal for interest rates to increase when a market cools down. This gives buyers less money to purchase a home with and can lead to housing prices dropping as sellers look to unload their properties.

The housing market is directly tied to interest rates so be sure to understand the state of the market. Whether it is prosperous or struggling should inform your mortgage terms.

The Bank of Canada 

The Bank of Canada influences interest rates as part of their overall economic and monetary strategies. This institution can dictate rates, including the overnight rate for banks, and can impact the Canadian exchange rate.

Owned by the Federal Government, The Bank of Canada is tasked with ensuring the financial welfare of the Canadian economy. What’s important for homebuyers to know is that The Bank of Canada takes the approach of steady growth and to avoid jarring interest rate fluctuations.

Provincial and National Economy

As mentioned, interest rates play off the supply and demand of the housing market. When demand is high, lenders want to charge more to borrowers to capitalize. When demand is low, lenders want to charge less to spark business.

Economic conditions fluctuate interest rates making the Provincial and Federal Government the biggest factor in determining the interest rate. The Government will act in accordance with the state of the economy and pursue stimulating it or cooling it through raising or lowering the interest rate, which will trickle down to borrowers.

The more borrowers understand the nature of interest rates, the more likely they are to make the right decision with respect to choosing the mortgage terms that work for them.

Applying for a mortgage loan is a thorough process that requires an in-depth financial audit. After choosing a lender, borrowers should get their application in order and the best way to do it is by using a checklist.

A succinct checklist can help you procure and organize all the different documents you will need to get. This will help your application avoid rejection due to missing information.

Here’s a checklist you can use for an upcoming loan application:

Employment Documents

You will need to submit a recent pay stub or pay stubs. All employment documents should be written and signed by your boss or the human resources department. It must be within 30 days of your application submission and detail your position, seniority, salary, hourly rate, average number of weekly hours and whether you’re a full or part-time employee.

Seasonal and part-time employees might need additional documents to verify their income.

Property Documents

You will require the following with respect to the property you want to buy:

• The mailing address of the property
• Proof of down payment
• Signed mortgage agreement
• Sales contract outlining the offer
• Listing and legal description
• For condo purchases, you will need a declaration, condo fees, and all documents pertaining to the health of the property
• Lawyer’s contact information

Asset and Liability Ledger

You will need to provide the lender with all your financial information. Your bank should be able to issue these documents and most people can access it via their online banking account.

You will need to provide a list of your assets and their value, and a list of your liabilities including total amount and repayment terms.

For your ease, here’s a checklist you can copy and paste and use as you prepare your application. Remember, variables exist depending on the lender, your financials and the loan amount. In addition, the lender can request additional documents.

Checklist:

• Personal information (full name, date of birth, SIN, contact info marital status, dependents, current address)
• Pay Stubs
• Letter of Employment
• Mortgage Pre-approval (if applicable)
• Bank statements
• Value of RRSPs
• Banking info
• List of assets
• List of liabilities
• Credit score
• The mailing address of the property
• Proof of down payment
• Signed mortgage agreement
• Sales contract outlining the offer
• Listing and legal description
• For condo purchases, you will need a declaration, condo fees, and all documents pertaining to the health of the property
• Lawyer’s contact information