Most Canadians strive to pay off their mortgages by the time they retire. But some may choose to take out a mortgage after retirement, for a variety of reasons.
The question is, is it a good idea to take out a mortgage when you retire? What are some of the implications that may come with this?
Read on to find out if you can qualify for a mortgage once you retire, and some of the challenges you might possibly face.
Can You Get A Mortgage During Retirement?
Just because you’re retired and no longer working doesn’t mean you can’t get approved for a mortgage. In fact, depending on your financial situation, you may be in just as good a situation — if not better — than a younger working individual. For instance, you may qualify for additional mortgage-related programs, such as a second mortgage, reverse mortgage, or home equity loan, among others.
Keep in mind that it may be tricky for a retired person to prove they have the cash flow needed to cover mortgage payments if they no longer bring in a traditional paycheque.
Will Your Age Matter?
Lenders are not allowed to discriminate against a mortgage applicant based on age. How old you are should play no role in your ability to secure a mortgage, Instead, you’ll simply have to meet the same qualifications as anyone else, including having a good credit score, a manageable debt level, and an adequate source of income that can cover your mortgage payments.
Remember, Times Have Changed
It’s worth noting, however, that things may be a bit different for retired individuals who apply for a mortgage today compared to the last time they purchased a home. Lending criteria have tightened over recent years, so it may be more difficult for anyone to get approved for a mortgage without a strong financial and credit profile.
Challenges Retirees May Face When Borrowing During Retirement
If you’re retired, you may face the following obstacles when applying for a new mortgage.
Less Borrowing Power
You may not be able to borrow as much as you would if you were bringing in a regular paycheque.
Assets May Not Be Helpful
Even if you own valuable assets, this may not be enough for you to get approved for a mortgage. When you apply for a mortgage, you’ll need to undergo a stress test, which looks at your income. In retirement, your income may not be what it once was, which could make passing the stress test more difficult.
High Equity May Not Be Enough To Qualify
If you currently own a home and have a lot of equity built up in it, this still may not be enough to help you qualify for a mortgage if you don’t have adequate cash flow.
Higher Interest Rates
If you’re unable to get approved for a home loan through a traditional bank, you may have better luck with a private mortgage lender. However, these lenders typically charge much higher interest rates, which would make your mortgage more expensive.
How To Qualify For A Mortgage As A Retiree
The requirements needed to qualify for a mortgage are the same whether you’re retired or employed:
Your credit score plays a key role in your ability to get approved for a home loan. Generally speaking, lenders want to see a credit score of around 640, but depending on the lender, 620 to 680 is a more accurate range.
If you’re ready to retire, your credit profile may already be well-established. If not, you’ll need to take steps to boost your credit score, which you can do by paying all bills on time, spending no more than 30% of your credit limit on your credit card, making more than your minimum payments on your credit card, and refraining from applying for other loans and credit accounts.
Obviously, you need to be bringing in a sufficient income that will allow you to make your mortgage payments on time every billing cycle. But aside from a traditional paycheque from an employer, there are other types of income lenders may accept:
- Retirement income (CPP/QPP, old age security, RRSPs, etc)
- Spousal support payments
- Rental income
- Investment income
In addition to your income, the lender will also look at your debt level. Even if you have a high income, you may not have enough left over to fully cover your mortgage payments if most of your money is dedicated to paying your current bills.
To verify whether you’re able to manage an additional bill on top of all your existing debt, your lender will calculate your debt-to-income ratio (DTI), which is a measure of your monthly income relative to your current debt. Ideally, your DTI should be no more than 42%, though each lender will have its own requirements.
Types Of Mortgages You Can Get When You Retire
There are a handful of different mortgage programs available, each of which comes with its own eligibility requirements that will impact your ability to qualify. Depending on your needs and financial circumstances, one option may be better suited to you than the other.
A traditional mortgage is one in which you’re given a specific loan amount that must be repaid by a certain due date, plus interest. Your mortgage payments will be made up of both principal and interest portions.
While it can be difficult to qualify for a traditional mortgage with a conventional bank when you retire, it is still possible. If you have good credit and an acceptable debt-to-income ratio, you may qualify for a traditional mortgage from a conventional lender.
However, if your credit or income is not up to par for banks, you may qualify with alternative lenders who usually have more flexible lending criteria.
These types of loans are available to those who are at least 55 years of age. You can access up to 55% of your home’s value and are not required to make any minimum payments. Instead, you’re only obligated to repay the loan when your home is sold.
The amount you qualify for is based on your home equity, the location of your home, and your age. Moreover, with a reverse mortgage, lenders place more emphasis on your home than on your credit scores or income, making it easier to qualify as a retiree.
Home Equity Line Of Credit (HELOC)
If you have enough equity in your current home, you may qualify for a HELOC, which is a type of revolving credit. It works similar to a credit card, except it’s secured against your home.
You’ll be granted access to a certain credit limit and can borrow from that equity whenever you need extra cash. You only pay interest on the portion you withdraw, and not the full credit limit. This can be a good choice for a retired individual as it’s easier to qualify for than a traditional mortgage.
Should You Get A Mortgage In Retirement?
Since you’re no longer collecting a paycheque, it’s best not to have a mortgage during retirement, for several reasons:
- Difficult To Cover Payments. A mortgage is one of the biggest debts you can have. If you add this bill to the pile after you retire, it may be more difficult for you to cover your mortgage payments without a steady income.
- You May Need To Tap Into Your Retirement Funds. If you’ve saved up for retirement over the years, you likely have intentions of using that money to enjoy your retirement. But with an added mortgage bill in the mix, you may have to access these funds to help make your mortgage payments if you find yourself in a financial predicament at some point.
- Tax Implications From Withdrawals. If you tap into certain types of investments to cover your mortgage payments, you may be faced with tax implications for early withdrawal. You’ll also miss out on interest earned on those deposited funds if you withdraw early.
While you may be able to take out a mortgage when you retire, it might not always be the best idea. Ideally, you should aim to be mortgage-free when you retire. That said, there may be an investment opportunity available that can help improve your financial situation and build even more wealth, even in your Golden Years. Just be sure to crunch the numbers so you don’t place yourself in a situation that could squeeze your finances beyond your comfort level.