Advantages of Home Equity Loans for Canadian Seniors
As you grow older, there may come a point when you decide to retire. At this point in life, you may wish to travel more or delve into a new hobby. The interests and goals of retired individuals will vary, and despite having savings and/or investments, you might find yourself in need of extra income. For those who own property, you may be eligible for a home equity loan. To understand, let’s explore the advantages of home equity loans for Canadian seniors.
What is Home Equity?
Equity is the value of the interest in your home. This value can change over time as payments are made on your mortgage, as renovations are made to the property, and as the market changes. Home equity is calculated as the difference between the market value of the home and the remaining balance owed on your mortgage.
If you purchased all or part of your home through a mortgage, your bank or lender has an interest in the property until the loan has been repaid. Equity is the remaining interest that you have as the property owner. This is usually acquired when the down payment is made.
What is a Home Equity Loan?
A home equity loan is a sum that is borrowed against the appraisal value of your property. The funds can be provided as a lump sum, which is then repaid over time in monthly payments. Some lenders also structure a home equity loan as a line of credit or HELOC, and you can advance funds as you require them.
As a homeowner, you can get this funding by contacting a lender directly or a mortgage broker. Do not bother doing an appraisal yourself, as the lender will not use it. They only use appraisals ordered internally from their own approved appraiser list. If it is a conventional/prime lender like a bank, approval is still based on your debt-to-income ratios as per the federal government stress test. Specialty lenders will have approvals based only on the equity in the home. Strict equity lenders will charge a premium on rate for the relaxed underwriting and sometimes fees.
What are the Advantages of Home Equity Loans?
There are several benefits associated with home equity loans for seniors. These include the following:
Supplemental Income
As you stop bringing home regular paychecks in your retirement years, your monthly income will inevitably be reduced. If you aren’t prepared for this income cut, your usual lifestyle may suffer, as you may no longer be able to afford to pay for your car, eat out as much as you used to, and spend money on hobbies.
To supplement your monthly income, you may want to secure a reverse mortgage, which would provide you with regular monthly payments taken out against your home’s equity.
Home Renovations
Upgrade the tiles in your living room to the hardwood floors you’ve always wanted, or redesign your kitchen to make it more spacious. Improving your home’s appearance, efficiency, or both with renovations will help increase the value of the property. This means that you’re basically creating additional equity.
Paying off Debts
A home equity loan can help you pay off your debts in one large payment rather than having to divide it up into smaller ones. In addition, paying off your debt in one large payment will lower your interest rates. The interest rate on your mortgage is often lower than other unsecured debts.
Covering Emergency Bills
Place the money you have been given in an emergency account. If you find yourself in a difficult predicament, such as an urgent medical situation or the aftermath of a death in the family, you can use your home equity loan to cover the cost of the bills.
Traveling
If you are someone who enjoys seeing new places, then a home equity loan can be a great way to fund your travel plans. From cruises to cross-country train trips and flights to faraway lands, the possibilities are only limited by your budget. Take advantage of your equity and visit the destinations you have been wanting to see.
Other Personal Expenses
A home equity loan can enable you to pay for personal expenses, such as a family wedding or a pet, to keep you company. Additionally, you can use the loan to learn a new skill requiring special equipment or to pay for your children’s education.
Larger Loan Amounts if You Have Lots of Equity
With home equity loans for seniors, the approved amount will ultimately depend on the value of equity accumulated in your property. If you are approaching retirement age, chances are that you have spent at least a decade in your current home. Because residential real estate prices in Canada tend to increase over time, your home has likely continued accumulating equity over these years, which means that you will be able to receive a substantial loan amount.
Have Funding to Help Your Children or Grandchildren
For younger generations who weren’t lucky enough to purchase their first homes years ago at reasonable prices, today’s dream of homeownership may seem unattainable. The good news is that you may be able to help your children or grandchildren achieve their homeownership goals sooner. By taking out some cash against your home’s equity, you will be able to assist younger family members in saving up for a down payment necessary to get their foot in the door of the coveted real estate market.
Buy Another House
Finally, taking out a home equity loan may provide you with an opportunity to invest in real estate by purchasing another house. You can then rent one of the properties out, receiving an additional stream of monthly income during your retirement years.
Who Can Get A Home Equity Loan?
Anyone who has equity in a home can apply for a home equity loan, but lenders will still use standard loan approval criteria to evaluate your application. Home equity loans are available to seniors who meet the following eligibility criteria:
- Sufficient home equity. You must have sufficient equity in your home to qualify for a home equity loan. Most of the time, you will not be able to take out more than 80% of the total value of your property.
- Age requirements. Specifically for senior home equity loans, most lenders will require the applicant to be at least 55 years of age.
- Stable income. Even as a retiree, you would need to demonstrate a stable source of income that would allow you to afford the loan payments. This income can come from pensions, retirement savings, social security benefits, or any other sources.
- Creditworthiness. Lenders will also review your credit score and debt-to-income ratio to evaluate your creditworthiness. The higher your credit score and the lower your debt-to-income ratios, the more likely you will receive favourable interest rates and other loan terms.
Here at the Seniors’ Lending Centre, we are here to help you make informed choices when it comes to your finances. Contact us today to learn more about your financial options with the help of our mortgage experts.
