Since home equity constitutes a significant distribution of Canadian wealth, it is natural to wonder how best to use this interest in retirement. Let’s look at three options for retirees: use the Family Net Worth Line of Credit (HELOC), take out the reverse mortgage and sell the home.
HELOC rates in Canada
HELOC is a simple and flexible way to spend your home net worth. You can borrow credits as needed and pay interest only on the balance you borrowed. As a secured loan, HELOC uses your home as collateral. Secured loans are usually lower interest rates than unsecured loans, such as personal loans and credit card debts. Currently, Canada’s HELOC interest rate is about 5% to 6%.
Many people have lines of credit during their work and use it for a variety of purposes. Retirees and retirees may consider credit lines to be a viable option for them when they retire. There are two problems with this expectation.
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First, if someone wants to apply for a line of credit, they must meet the same criteria for applying for a mortgage. Among other considerations, lenders will assess the applicant’s borrowing ability based on income. Since income after retirement tends to be low, credit approval for retirees may be restricted. (Read the credit line and personal loans.)
HELOC limits can usually account for 65% of the home’s value, while the combination of mortgage and HELOC balances cannot exceed 80% of the assessed value. However, the borrower’s income will determine how close the upside threshold the borrower may obtain.
Second, Canadians who are counting on using HELOC in retirement find that their credit limit may shrink. Lenders can lower HELOC restrictions and may do so for a number of reasons. For example, the recent deterioration in home values has resulted in less equity holdings as collateral. Recently, I have seen some credit lines have been frozen or closed for non-usea and retired homeowners. While you may not need outstanding balances other than regular monthly interest payments, you can reduce the available credit limits.
Turning off dormant HELOC may just be a way for a bank to reduce the responsibility of unprofitable products. This seems to be more common in terms of unsecured credit cards and credit cards compared to HELOC.
Retired homeowners (which may be lower than those who earned at work) are sure to have a risk of limiting restrictions. Two of my clients recently had to provide documents on income, as if they had reapplyed for credit, thus reducing the borrowing limit.
