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.
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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.
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.
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
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.
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.
- 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
- 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.
- 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
- 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.
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.