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 circ*mstances, 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 circ*mstances 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.
Rebecca
Rebecca Awram is a BCFSA-licensed independent mortgage broker with nearly 15 years of experience. She brings a wealth of financial and business knowledge from over two decades in software development, investments, and real estate. She holds degrees from the University of British Columbia, Douglass College, and Simon Fraser University. Rebecca is also an active member of the local Chamber of Commerce and CMBA-BC.
Specializing in senior mortgage solutions, Rebecca offers impartial, patient, and diplomatic advice combined with sharp negotiation skills when you need them most. She’s committed to finding tailored mortgage options for your unique needs, such as reverse mortgages, traditional mortgages, or home equity loans. Beyond her professional life, Rebecca loves everything outdoors, including hiking, backpacking, cycling and kayaking.
As a seasoned expert in the field of mortgage and financial solutions, I bring forth a wealth of knowledge and hands-on experience in the realm of home equity loans and alternative financing options. With an extensive background in software development, investments, and real estate, I have spent nearly 15 years as a BCFSA-licensed independent mortgage broker. My educational journey includes degrees from the University of British Columbia, Douglass College, and Simon Fraser University, further solidifying my foundation in the intricate landscape of mortgages.
Now, let's delve into the concepts mentioned in the provided article:
Home Equity Loans
Definition: Home equity loans are loans secured by the borrower's home, utilizing the property as collateral. The loan amount is determined by the difference between the mortgage balance and the current market value of the home.
Working Mechanism: Lenders typically offer up to 80% of the home's value. As the borrower repays the loan, the equity increases, and payments are made monthly. The interest rate is usually lower than a credit card but higher than a prime mortgage.
Benefits:
- Focuses on home value and mortgage amount, reducing the emphasis on income and credit score.
- Useful for retirees without sufficient income for a federal government stress test.
- Provides a lump sum for significant financial needs.
Non-Qualifying Loans
Definition: Refers to home equity loans where credit score and income are crucial for determining interest rates. A low credit score or insufficient income may result in higher interest rates, known as non-qualifying equity loans.
Importance of Credit Score: While income is a primary consideration, credit score impacts the interest rate on non-qualifying equity loans. Lenders may charge additional fees based on their internal risk metrics.
Alternative Options
Home Equity Line of Credit (HELOC)
Definition: Similar to a home equity loan, a HELOC allows borrowing against home equity. Instead of a lump sum, borrowers receive a line of credit with variable interest rates and unfixed payments.
Advantages:
- Offers flexibility with the ability to draw funds as needed.
- Lower interest rates than traditional home equity loans.
- Ideal for those requiring smaller sums over an extended period.
CHIP Reverse Mortgage
Definition: Specifically designed for homeowners over 55, CHIP reverse mortgages provide access to home equity without regular payments. Repayment is required only upon selling the home or the homeowner's passing.
Benefits:
- Allows homeowners to retain ownership while accessing equity.
- Tax-free payments and no impact on government benefits.
- Loan balance never exceeds the fair market value of the home.
Conclusion
Retirees exploring financial options, including home equity loans, HELOCs, and CHIP reverse mortgages, should carefully consider their needs. Each option has unique benefits and qualifications. Seeking guidance from financial experts, like those at the Seniors’ Lending Centre, can aid in making well-informed decisions tailored to individual circ*mstances.
The author of the article, Rebecca Awram, stands out as an experienced mortgage broker specializing in senior mortgage solutions, offering personalized advice for reverse mortgages, traditional mortgages, and home equity loans. Her commitment to clients, paired with a diverse financial background, positions her as a valuable resource in navigating the complexities of retirement finances.
