As the Canadian population gets older, more seniors than ever before are looking at their loan options as part of their retirement planning, including the possibility of obtaining a mortgage.
Whether it's to purchase a new home in the booming Canadian housing market, refinance an existing mortgage, or tap into home equity, it’s important for seniors to understand their mortgage options in Canada.
In this article, we will look at the mortgage financing options for seniors in Canada such as traditional mortgages, Home Equity Lines of Credit (HELOCs), and reverse mortgages. We’ll also dispel common myths about seniors and mortgages.
- Seniors can get traditional mortgages or HELOCs if they can meet the same income and credit requirements that every other applicants must meet; lenders cannot discriminate based on age in Canada
- Retired seniors on pension income do struggle, however, to meet the standard mortgage qualifying rules for traditional mortgages and HELOCs
- Reverse mortgages are designed for seniors and do not use the same qualifying rules as traditional mortgages or HELOCs; reverse mortgages are approved based on the borrower’s age and home value
Understanding Mortgages for Seniors
What is a mortgage?
A mortgage is a loan taken out to buy property or land. The loan is 'secured' against the value of the home until it's paid off. If you can't keep up your repayments, the lender can repossess (take back) your home and sell it to get their money back.
Mortgage Eligibility Rules for Seniors
When it comes to seniors, people often believe they cannot qualify for a mortgage because they are too old. This is not the case. In Canada, it's illegal for a mortgage lender to decline an application based solely on age. In fact, seniors can apply for any type of mortgage just like anyone else.
However, they must meet the same standard income requirements, the same debt ratio requirements and the same credit score rules as younger borrowers.
How Do Mortgage Eligibility Rules Impact Seniors?
Even though the standard mortgage eligibility rules apply to seniors the same as everyone else, seniors can find it difficult to get approved for a mortgage once they are retired.
This is because mortgage lenders, whether they are traditional banks or other financial institutions regulated by the Office of the Superintendent of Financial Institutions, look for proof of steady income and a good credit score.
Meeting these requirements can be tough for some seniors, especially those who are retired and without a regular salary or those who are only receiving a lower pension income. This lower pension income results in many seniors failing the income and debt servicing rules lenders require for mortgage approvals.
The net effect is that lenders decline mortgage applications from seniors, leading many people to think that there are special rules for seniors to get a mortgage.
But as we mentioned, that is not the case. Seniors simply have more issues satisfying the standard mortgage qualifying requirements.
In the following section, we will outline the mortgage options available to seniors in Canada.
Types of Mortgages Available to Seniors
There are several types of mortgages available to seniors in Canada, each with its own set of benefits and drawbacks. The three primary options are traditional mortgages, Home Equity Lines of Credit (HELOCs), and reverse mortgages.
Just like any other borrower, seniors can apply for a traditional mortgage to purchase a new home or refinance an existing mortgage. The key factors that lenders consider are the applicant’s credit score, income, and debt-to-income ratio.
If a senior can satisfy the standard requirements for credit score, income and debt-to-income ratios, they can get approved for a traditional mortgage for any purpose, including buying a new home, refinancing their existing mortgage or to consolidate debts.
Traditional Mortgage Payment Obligations:
Traditional mortgages require the borrower to make regular scheduled payments of interest and principal. For seniors, these payment obligations can become difficult if their healthcare costs increase or their income levels suddenly drop.
Home Equity Lines of Credit (HELOCs):
A HELOC allows homeowners to borrow against the equity in their home. A HELOC is very popular among seniors because interest does not need to be paid unless the homeowner borrows money from the HELOC.
HELOCs offer flexibility as they can be used for a variety of purposes, including home improvements, debt consolidation, or as a safety net for unexpected expenses. They usually have lower interest rates than credit cards and personal loans, making them a cost-effective borrowing option for anyone.
A HELOC also is known as a “revolving” loan because as the borrower pays off the loan, they can borrow the money again (and again as they pay down the loan balance). This revolving feature is different from a traditional mortgage, where the loan balance only goes down and the money cannot be reborrowed.
HELOCs have the same qualifying requirements as traditional mortgages and do not have any age rules. So long as a senior can satisfy the requirements for credit score, income and debt-to-income ratios, they can obtain a HELOC.
HELOC Payment Obligations:
HELOCs are popular with seniors because they only require a minimum monthly payment of interest on the amount borrowed. This differs from traditional mortgages, which require a repayment of principal and interest.
For seniors who might be experiencing monthly cash flow issues, the requirement to only make interest payments can be very attractive.
A reverse mortgage, commonly known as a CHIP Reverse Mortgage in Canada, is a loan that allows homeowners over 55 years to borrow money using the equity in their home as security.
A reverse mortgage is a financial product designed specifically for seniors. They are different from traditional mortgages and HELOCs because they do not have any minimum income requirements or debt-to-income rules. Reverse mortgages also do not have credit score requirements. As a result, reverse mortgages for low income seniors are becoming a popular choice.
The homeowner can use the reverse mortgage loan for any purpose, such as supplementing retirement income, covering daily living expenses, or paying for home improvements. The homeowner can choose to receive the money in a lump sum, regular payments, or a combination of both.
While traditional mortgages and HELOCs can be obtained for any property, a reverse mortgage can only be obtained for the borrower’s primary residence.
Reverse Mortgage Payment Obligations
One of the biggest advantages of a reverse mortgage is that it does not require monthly repayments. Instead, the loan, along with interest, is repaid when the homeowner sells the home, moves out, or dies. This feature makes reverse mortgages an attractive option for seniors who have substantial equity in their homes but may have a limited income.
However, it's important to understand that while a reverse mortgage can provide immediate financial relief, it also increases the debt against the home over time as interest accumulates and may decrease a senior’s equity in their home.
Comparing Mortgage Options for Seniors
When it comes to choosing a mortgage option, it's important for seniors to consider their financial situation, needs, and long-term goals. Each type of mortgage—traditional, HELOC, and reverse—has its own set of advantages and disadvantages. Traditional mortgages and HELOCs require regular payments, which can be a challenge for those with a limited income.
On the other hand, while a reverse mortgage does not require monthly payments, many retired homeowners hesitate with getting one because they have heard horror stories about reverse mortgages. We’ve debunked many of these reverse mortgage myths and tell homeowners the product can be a wonderful way to experience a stress-free and dignified retirement.
Before making a decision, seniors should consult with a mortgage professional (especially one who is familiar with reverse mortgages). They can provide guidance and help seniors understand how each of the loan options work.
Preparing to Apply for a Mortgage
Before applying for a mortgage, seniors should take steps to ensure they are in the best possible financial position. This includes checking and improving their credit score, paying down debt to improve their debt-to-income ratio, and gathering necessary documentation such as proof of income or identification documents.
It's also important for seniors to understand the details of the mortgage they are applying for, including the interest rate, term, and any fees or penalties associated with the mortgage.
Consulting with a mortgage professional is critical in this process to avoid getting the wrong type of loan, a high interest rate or the wrong loan term.
To wrap up, there are 3 types of mortgages for seniors in Canada. Whether you are looking at a traditional mortgage, a HELOC, or a reverse mortgage, the best choice depends on your financial situation, needs, and goals.
By understanding the different options and preparing adequately, seniors can make an informed decision that supports their financial well-being in their golden years.
- Will a reverse mortgage affect my pension or government benefits like CPP or OAS?
Any money received from a reverse mortgage is a loan, not income. You receive the money from a reverse mortgage tax-free and it will not decrease your government benefits like CPP or OAS. You can combine your pension with a reverse mortgage without any issues.
- Can I get a reverse mortgage if I still have a mortgage?
Yes, the reverse mortgage will be used to pay off your existing mortgage and the balance of the money can be spent as you wish. Depending on your age, you can get up to 59% of the value of your home with a reverse mortgage. To see how much you might be eligible for, you can use an online reverse mortgage calculator that does not require personal information.
- Can I get a reverse mortgage from any bank?
There are only 2 banks that offer reverse mortgages in Canada (HomeEquity Bank and Equitable Bank). If you go to your branch and ask for a reverse mortgage, you will be referred to HomeEquity Bank. We strongly recommend you work with a mortgage broker to get unbiased advice and the most suitable mortgage solution for your needs.