Although the process of renewing a mortgage is challenging at any age, it may be particularly difficult to navigate when you’re a senior and are contending with major life changes like retirement or helping adult children get their feet on the ground in today’s tough economy.
Here’s what you need to know about renewing your mortgage as a senior and what your options are at renewal time.
What’s unique about seniors when it comes to renewing?
Although your mortgage renewal won’t be affected by age alone, it may be affected by your income, pension, and/or savings.
“There’s no issue specifically related to their [seniors’] age,” says Elan Weintraub, Co-Founder and Mortgage Broker at Mortgage Outlet. “The issue is related to their income and ability to pay the mortgage.”
During this time, your priorities and spending habits may change as you retire. You might have more leisure time to travel or pick up new hobbies, or perhaps you face the added pressure to help adult children with their own unique financial obligations.
“When you retire, your life changes,” says Weintraub. “More and more seniors are taking mortgages into their retirement and borrowing more. Whether it’s to help their kids [or] grandkids to pay for their quality of life.”
Another consideration that seniors may be grappling with is how they envision the last years of their lives looking. Long-term care may take you out of the family home and using the sale proceeds to cover living in a retirement home or an assisted living centre. Staying in the house, on the other hand, might require expensive upgrades and personal support services.
As such, when renewing their mortgages, it’s important that seniors carefully assess their cash flow as well as long- and short-term financial goals and life plans. Further, with rampant inflation over the past few years, seniors should consider how high interest rates are affecting their financial plans.
How have seniors been impacted by high interest rates?
In their effort to slow inflation, the Bank of Canada has increased interest rates which has resulted in higher mortgage payments for variable-mortgage holders and will likely lead to increased interest rates for fixed-mortgage holders. That means that for seniors who are still paying off their mortgage, higher payments have left some seniors struggling to pay off their mortgages and make ends meet.
A 2022 survey by the Angus Reid Institute reported that 48% of older Canadians said they felt they couldn’t handle an unexpected expense. As such, many are adapting their lifestyles to cut back on expenses including spending less money on socializing or donating to charity.
Further, for seniors who are approaching retirement, high interest rates may be impacting plans to retire. Some may be considering renting out part of their home or getting a part time job after retiring to have more cash flow.
In either case, for those with a mortgage, high interest rates have been increasing monthly payments which has forced seniors to re-evaluate their plans and spending. This may look like cutting back spending in some places or coming up with other creative solutions to make ends meet while coping with high interest rates.
While accessing cash to make ends meet and maintain a comfortable lifestyle has been a challenge for seniors in recent times, one option may be tapping into their home equity.
How can seniors access the equity in their homes?
According to a survey done by Royal LePage, 75% of Canadian Baby Boomers own their home with 64% being mortgage free. As such, accessing their home equity may be a strategic way to temporarily cope with high interest rates and maintain their goals for the future.
Here are a few options for seniors to tap into their home equity:
Refinancing is usually the best option if you’re able to cover your monthly payments and tends to offer the best rates. This option allows people to borrow 80% of their home’s value which can be repaid over 25-30 years. Refinancing is often best for people with a healthy source of income, pension or a steady cash flow from retirement savings.
A reverse mortgage is often preferable for people with a modest source of income or no source of income. This option allows you to borrow up to 55% of your home’s value which can be received as a lump sum or in monthly payments. However, a downside is that interest rates are usually higher than other options. Typically, the full loan and accumulated interest is only paid off once you sell your home pass away.
Home equity line of credit (HELOC)
A HELOC is a line of credit where people can borrow up to 65% of their home value. Similar to a credit card, a HELOC is a revolving line of credit which requires that borrowers keep up with monthly payments, so their debt doesn’t spiral out of control. For this reason, HELOC is not recommended if you’re looking to use the cash to create an emergency fund. Another challenge to using a HELOC for seniors is that applicants must provide proof of employment income in order to be approved for a loan. That’s why this option is best suited to seniors who have a few working years to go before retirement.
When your mortgage term is over and up for renewal, your lender will approach you with a new offer. At this time, you can decide to renew and keep paying off your mortgage or to tap into your home equity. However, before agreeing to a contract, it’s always in your best interest to compare different mortgage rates and/or negotiate with your lender.
Compare Mortgage Rates
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.