Mortgages & Pre-Retirement Planning

Last updated November 9, 2022

Essential Mortgage Planning Tips BEFORE you Retire/Quit Your Regular Job

As you approach retirement, before relocating or downsizing, or otherwise before losing your regular predictable employment income, you may want to consider to position yourself to retain access to your home equity and be aware of your future lending options - it's smart retirement planning in my opinion. Once you lose your regular employment income, your lending options are drastically reduced and your home equity may become trapped forcing you to sell or change your plans if there is an acute need for money. I always say, the best time to apply for credit is when you don't need it!  Please enjoy the video (click the image) and the supplementary discussion below.

Recently, I recall a conversation with a gentleman who had just quit his well-paying job in Calgary ready for a well-deserved retirement with his wife, looking to buy property in BC’s gorgeous interior vineyard country. Even after the sale of his Calgary property he would need a modest mortgage on BC, but that would be all right - he thought - as he had excellent credit and never had problems getting mortgages in the past. He was wrong. He’d snookered himself.

Pre and post retirement lending solutions

In the mortgage lending world the river splits - lots of choice at great rates for those with predictable and provable income, and much less/limited/no choice for those without, including the gentleman from Calgary. So it is imperative in my opinion to prepare for retirement well in advance and that includes understanding your mortgage options.

For many homeowners in Canada, a significant amount of your wealth is tied up in your property as home equity.  Equity is the difference between what your property is worth if you sold it today and what you owe on it (mortgages + lines of credit secured to the property). 

In my opinion, paying off your home mortgage is kind of like putting your money into a black hole that you will never see again until you sell and downsize or exit home-ownership altogether. The only apparent prize for reaching the mortgage-free milestone is to ditch the monthly payment!

But your home equity can be an important retirement financial planning tool if you connect it to some sort of mortgage product that allows you to access your equity when or if required pre and post retirement. 

Prior to retirement (loss of income), a popular option is to have a home equity line of credit attached to your property. This gives the homeowner a standby source of funds at an interest rate relative to bank prime rate, typically Prime + 0.5%. You only pay interest on the outstanding balance, so if you have no balance you have no payment. We will talk more about this below.

After retirement, your pension income or equity may support a small regular mortgage against your property (with an ongoing monthly mortgage payment) or there may be a Reverse Mortgage option (without a monthly mortgage payment). 

A reverse mortgage is a federally-regulated mortgage product that allows homeowners to borrow against their home equity (lump sum or via monthly advances) and the monthly interest payment is tacked on to the loan balance such that the loan balance is growing every month. In that regard, the maximum amount of money that you can borrow is based on your age with the least amount of money available to you starting at the age of 55 (say 15% of your property value) and the most amount available to you at the age of 85 (say up to 55% of your property value). Generally,  properties appreciate in value over time and this appreciation in value is more or less equal to the same rate in which the interest is accumulating. Reverse mortgages (without a monthly payment) have a higher interest rate than traditional mortgages with a monthly payment -  ballpark 1.5% to 2.5% higher.

If you need to tap into your home equity money in your retirement years and you cannot qualify for a traditional mortgage, the reverse mortgage option becomes the best option at the best interest rate and the most money you can get assuming you want to stay in your property and not sell. 

It is all about maximizing options

An important theme in this blog is that you can improve your post retirement access-to-money options beyond a reverse mortgage with some pre-retirement mortgage planning! The term “option” when used in finance means you have the right to call on something without an obligation to do so.  Creating options in everything you do helps prevent train wrecks. 

Back to the options available to you while you are still working, I mentioned a Home Equity Line of Credit (HELOC) as a popular choice. Even with your regular mortgage paid off, a HELOC can sit quietly attached to your property with a zero balance standing by for when need arises (perhaps an emergency home repair, help a family member, etc.)  If you do have a balance on your HELOC, your monthly minimum payment is the accrued interest. If you are unable to, fail to, or forget to make that minimum payment, your credit file will be marked as a late payment (mortgage or otherwise) and you are at risk of losing access to your HELOC due to credit scoring. (In that regard, always set up your debts to automatically pay from your chequing account at least the minimum required payment and set up overdraft protection on your chequing account instead.)

Theoretically, you can use further advances from your HELOC to make your HELOC monthly interest payments. In essence, you are synthesizing a reverse mortgage! Just bear in mind, you will run out of credit limit at some point which will force the sale of your property if you can no longer make your interest-only payments. This would be a very advanced strategy, and a reverse mortgage would be a safer alternative if you do not know what you are doing.

I'd now like to introduce my favorite pre-retirement mortgage product that not only resolves some problems mentioned above but also drastically improves one’s financial options as you make or contemplate major transitions in life. That product is a Re-Advanceable Mortgage/HELOC.

A re-advanceable mortgage has a global credit limit equal to your mortgage balance and your line of credit limit and not to exceed 80% of your property value. As you pay down your mortgage, the principal repayment serves to automatically increase your line of credit limit such that the global credit limit is maintained.

Why this is so incredibly powerful in the right hands is that it encourages the homeowner to aggressively become mortgage free without worry, knowing that each payment made can immediately be accessed as their home equity (simply write a cheque). The black hole in which you pour money trying to become mortgage free in a traditional mortgage as mentioned above is no longer a black hole but building on future access to equity for pre-retirement positioning or in your retirement years should a need arise. This is incredibly liberating for me and my wife.

Before you quit your day job

Let’s circle back to the Calgary retiree who snookered himself.  Had I talked with him prior to giving up his job, we would have created access to his home equity in advance while he was still well-employed to create a down payment which would then be used to purchase BC as a second home or as a ‘rental’ property. I would also have put a re-advanceable mortgage on the BC purchase and structured it with only a small mortgage leaving the rest as an open line of credit (no penalty to repay the LOC when Calgary sells).  He could then quit work, sell Calgary and put the sales proceeds against the LOC component of his BC re-advanceable mortgage, which property he then occupies.

The BC mortgage/HELOC would then be in place well into his retirement years with no need to requalify and provide future access to the majority of his home equity should he ever need it. That’s called peace of mind.  The same strategy can be adapted to developing a dream home, buying a lake cottage, buying an RV or vacant lot, or even to buy a vacation property in a warm climate.

If you’d like some peace-of-mind mortgage planning, please reach out to me or my team before you quit your day job!


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Cheers - Chris Richards