Can a Retiree Get a Home Equity Loan? | Seniors Lending Centre

Table of Contents

Home equity loans are secured by the home owned by the borrower in question, otherwise known as collateral. That means, if you have sufficient equity – the difference between what you owe on your mortgage and the current market valuation of the property – you can obtain that amount and repay it over time as a loan. This is useful if you plan on making various renovations to your home, intend to travel, or otherwise.

If you’re retired, you might be wondering whether you can obtain a home equity loan. The good news is, yes, you can! In addition to home equity loans, there are other options available to you that may be more suitable for your unique needs. Let’s explore home equity loans and some alternatives to know about together.

How Home Equity Loans Work

Here’s a quick example. Let’s say that the value of your home is somewhere around $750,000, and your remaining mortgage balance is $200,000. This means your equity would be $550,000, but that is not the maximum amount you can convert into a loan. Lenders normally won’t give you more than 80% of the home’s value, and many programs are even less.

As you pay off your loan, equity will continue to increase as your home accumulates further value. Payments are made monthly. The interest rate for a home equity loan is typically quite low compared to that of a credit card, but it’s usually higher than that of a prime/conventional “qualifying” mortgage, so be sure to reach out to our experienced mortgage specialists if you are having trouble deciding. Also, bear in mind that your home needs to be appraised by the lender.

Benefits of a Home Equity Loan

Since a traditional home equity loan focuses on the value and mortgage amount of your home, you don’t need to be concerned as much about your income, work history or credit score if you want to apply. This means that you likely won’t need to worry about passing various qualifications as you would with other forms of financing through your bank.

If you do not have a sufficient income that can qualify you under the federal government stress test (a set of guidelines put in place by the government to ensure borrowers can afford to repay their loans), whether from pensions or retirement savings plans or otherwise, then a home equity loan may be a feasible option for you. This is especially the case if you need a larger lump sum of funds than what would be provided through a reverse mortgage.

What You Need to Know About Non-Qualifying Loans

Of course, while your credit score isn’t as important as your available income in securing a home equity loan, both are equally essential in terms of the interest rate you’ll have. This is important to bear in mind if you want the lowest rates possible.

We previously mentioned that interest is higher than that of a prime mortgage, but if you have a low credit score or less than the appropriate income amount, it will increase further. This is otherwise known as a non-qualifying equity loan, and some lenders may potentially charge a fee on top of this. The lender will price the file according to their internal risk metrics, and credit score will play a role in the interest rate.

All in all, can a retiree get a home equity loan? Definitely – it’s a great choice if you’re in need of a sizable lump sum of funds and are comfortable with using your home as collateral and making payments that are higher than that of traditional ‘qualifying’ mortgages.

Alternative Options to Home Equity Loans

While home equity loans can be a great option for retirees in Canada, depending on your circumstances, other options may be more feasible. Let’s discuss the difference between a Home Equity Line of Credit (HELOC) and a reverse mortgage as alternative financial pathways.

Home Equity Line of Credit (HELOC)

Like a home equity loan, a Home Equity Line of Credit allows you to borrow the equity you’ve built in your home. However, instead of getting a lump sum, you receive a line of credit that you can draw on at any time in different amounts.

Another difference between HELOCs and home equity loans is that the latter has fixed payments and interest rates, while the former typically has unfixed payments and variable interest rates. In other words, the minimum payments and interest rates for HELOCs depend on variables like improved credit or changing market rates.

One of the main benefits of HELOCs is that they give retirees more flexibility than home equity loans. You can use the line of credit at a time that’s convenient to you and only pay interest on the amount advanced. For example, HELOCs can be used to draw funds in emergencies, while home equity loans don’t allow additional borrowing on top of the lump sum. Here are some other advantages of this option:

Often have lower interest rates than traditional home equity loans — the minimum monthly payment is typically interest only, making for a more cost-effective option for retirees with limited income.
Ideal for those who need smaller sums of money over extended periods.

One downside is that HELOCs still require qualifications based on credit score, income, and debts, unlike pure home equity loans, which are typically only based on the value of your home.

CHIP Reverse Mortgage

CHIP Reverse Mortgages are our specialty. If you’re a homeowner over the age of 55, you can access the equity in your home without making regular payments (interest or principal). Instead, the lender makes payments to you, and no repayment is required until you sell the home or pass away — this is the main difference between a CHIP reverse mortgage and HELOC (and a home equity loan, for that matter).

A CHIP Reverse Mortgage has many benefits:

You can keep the house in your name while still accessing the equity you’ve built up.
You get to keep the equity left in your home after you repay the reverse mortgage (if you sell your property to pay it back).
All money you receive is tax-free.
Reverse mortgages do not affect Old Age Security or the Guaranteed Income Supplement.
Depending on your age at the time of borrowing, you can receive up to 55% of your home’s value.
Your loan balance will never exceed the fair market value of your home.
Often does not require credit checks to qualify, unlike HELOCs.

Finding the Right Options

Retirement is an exciting time in life. If you’re looking for different financial options to support yourself or the ones you love, you can rest assured knowing that various loans are available. It’s important to speak with an expert to help you evaluate your current circumstances and decide if a home equity loan, HELOC, or CHIP reverse mortgage is right for you.

To make a well-informed decision regarding your finances, our team at the Seniors’ Lending Centre is happy to help. Contact us today to discuss your needs with our financial experts. Alternatively, feel free to fill out our no-obligation quote form.