Using Home Equity in Retirement
As a significant allocation of Canadian assets, it’s natural to wonder how home equity can be best utilized in retirement. In this article, we’ll explore three options for pensioners: using a Home Equity Line of Credit (HELOC), a reverse mortgage, and selling the house.
Understanding HELOCs in Canada
A HELOC is a flexible way to tap into home equity, allowing borrowers to access a credit line secured by their home. With a HELOC, you can borrow up to your credit limit and only pay interest on the borrowed balance. As a secured loan, HELOCs typically have lower interest rates than unsecured loans, such as personal loans and credit card debt. Currently, HELOC rates in Canada range from 5% to 6%.
Challenges with HELOCs in Retirement
While a HELOC may seem like a practical option for retirees, there are two significant challenges to consider. Firstly, to apply for a HELOC, borrowers must meet the same criteria as they would for a mortgage, including an assessment of their creditworthiness based on income. Since retirement income is often lower, the loan limit for pensioners may be restricted.
HELOC Limitations and Income
A HELOC limit can typically reach up to 65% of the home’s value, and the combined mortgage and HELOC balance cannot exceed 80% of the estimated value. However, the borrower’s income will determine how close they can get to these upper thresholds. For retirees, the reduced income may limit their access to a HELOC.
Risk of Reduced Credit Limits
Secondly, Canadians relying on a HELOC in retirement may be surprised to find that their credit limit can shrink. Lenders can reduce a HELOC limit for various reasons, such as a decline in house values, resulting in less equity as collateral. In some cases, credit lines have been frozen or closed due to non-use, even for retired homeowners. While there may be no obligation to repay the outstanding balance, the available credit limit could be reduced.
Conclusion
In conclusion, while a HELOC can be a flexible way to access home equity, retirees should be aware of the potential challenges and risks involved. The reduced income in retirement may limit access to a HELOC, and the credit limit can shrink due to various factors. It’s essential for retirees to carefully consider their options and plan accordingly to make the most of their home equity. By understanding the pros and cons of HELOCs and exploring alternative options, such as reverse mortgages and selling the house, retirees can make informed decisions about their financial future.