Mortgage expert Jake Abramowicz says he sees seniors taking equity out of their homes. ‘If there’s a good business case to be made in taking out a mortgage at this age, then let’s do it.’Jennifer Roberts/The Globe and Mail
When Lenore K., a former corporate communications manager in Toronto, retired recently at 66, she and her husband considered how they might further optimize their money.
In addition to Ms. K.'s private pension, the couple also have government pensions, retirement savings plans, a tax-free savings account and investments in mutual funds. They own their house, having paid off any mortgages a decade ago, but they are considering taking out a low-interest, fixed-term, 30-year mortgage and investing the money in other ways, such as in the mutual funds that currently give them up to a 6-per-cent annual return.
When they next meet with their financial adviser, they're planning to work out their risk tolerance and get his advice on whether to go ahead and use the equity in their house to get a bigger return.
Before taking on mortgage debt, Ms. K., who asked that her full name not be used, believes she and her husband need to consider all the risks involved, such as whether mutual funds or stocks will become less stable because of world events including Brexit in Britain and Donald Trump's election in the United States.
"Taking out a mortgage is a gamble that might be worth it, but could also backfire if mortgage rates go up significantly when it's time to renegotiate," says Ms. K. "When we bought our first house in 1981, rates were over 18 per cent. I remember that. If rates continue going up and we have to pay a penalty to get out of the mortgage, that would negate the [market] profits. You have to make sure you can afford the loss."
Whether it's smart for senior citizens to be taking out cheap fixed-rate mortgages on their paid-off homes is open for debate. Conventional wisdom would suggest it's not a good idea to enter retirement with debt, or take on new debt once retired, but cheap long-term mortgages may be tempting more seniors to take advantage of the equity in their home to reinvest for a bigger return or to just use the money for whatever they want.
There aren't any statistics to determine how widespread this practice is in Canada, and Jake Abramowicz, a mortgage agent at Mortgage Edge in Toronto, says he hasn't seen enough of a rise in the number of seniors taking out mortgages to call it a trend. But he does see a lot of seniors taking out equity from their house.
Even if the payment might be $1,000 a month for a $250,000 mortgage, they can invest that $250,000 in some sort of fixed-income fund, which will still yield them more than their mortgage payment. He also sees many seniors taking advantage of home equity lines of credit, where payments are interest-only rather than a fixed mortgage payment of principal and interest.
He says the three primary motivations are for investment, for home modifications or renovations, or to help their children or grandchildren buy a home. Whether it's wise really comes down to the financial situation of each individual, but in certain cases, he thinks it makes sense.
"It's all based on the senior's cash flow," Mr. Abramowicz says. "If there's a good business case to be made in taking out a mortgage at this age, then let's do it, but only if there's a comfortable margin from a cash-flow perspective. What I mean by that is, what's your income? I'm not talking about [renting] out the basement, because that could go away. But if it doesn't put the senior at any risk, it's not any different than for a 35-year-old with a steady income. Pensions are pretty secure these days."
Mr. Abramowicz says most of the seniors he deals with have great government and private pensions, and often have received significant inheritances in property or savings. But with interest rates starting to trend upward, he likes to apply a stress test for seniors taking out a mortgage.
"What will be the payment at renewal?" says Mr. Abramowicz. "If you take out a mortgage at 2.5 per cent today and, in five years, rates go up to 4.5 per cent, can you still afford it based on your pension income?"
Another issue is whether seniors can even get approved for 30-year fixed-rate mortgages that they likely will not be around to repay. While it's illegal to discriminate in Canada based on age, Mr. Abramowicz says he's hearing about a bit of ageism with some institutional lenders when an older person applies for a mortgage, especially if it's over a longer-term amortization period.
"If you're in your 60s or 70s, it's not a slam dunk that you can get a 30-year amortized loan any more," says Mr. Abramowicz. "Lenders are very risk adverse about who they're lending to, whether it's a 78-year-old individual or a 19-year-old – it goes both ways. When an older mortgage applicant is turned down, age is never given as the reason, but I sometimes suspect if the person wasn't that age, they wouldn't be declined."
His advice for seniors is to focus on getting a mortgage with the lowest rate for the longest term of their choosing. It's also important that the mortgage terms be flexible with good prepayment options or low penalties if they had to break it.
"Make sure that you have a holistic view of why you're doing this," says Mr. Abramowicz. "You want to protect your equity and make sure you can afford it without affecting your lifestyle so you can enjoy things in your retirement. You don't want to be encumbered and not be able to do something because you've taken out too big of a loan."
Terry Greene, president of TPG Financial Service Inc., a fee-only financial planning firm in North Vancouver, says what seniors can do depends on the equity in their house and other assets they may have. If they've got a decent pension and a house that's mortgage-free, they may want to tap into that, he says. But it's key that they have the cash flow to deal with the extra debt and an exit strategy associated with that option.
"Quality of life matters," Mr. Greene says. "If you have a $1.5-million house sitting there and you've never travelled in your life and are now in your 60s, with 10 or 15 more years before the health issues start popping up, there are worse ideas than borrowing money to go out and live those dreams. It may impede your lifestyle not to tap into the equity in your house."
He sees more seniors taking out a line of credit rather than mortgages, but either way, he says they're still tapping into their equity.
"I have some clients who are investing in second mortgages that are paying them 7 or 8 per cent and they're borrowing on their home at 2 or 2 1/2 per cent," Mr. Greene says. "The merit depends on the risk involved with the mortgage itself and cash flow is also a consideration. If the second mortgages pay cash flow monthly, it's a pretty good idea because the investment covers your own mortgage or line of credit repayment. I'd prefer that investment over the stock market because stocks have a lot more volatility."
Mr. Greene believes if you decide to cross a few things off your bucket list, your overall financial plan will keep you from finding yourself in a bad scenario down the road.
"I don't tend to think things are sacrosanct," Mr. Greene says. "There are various ways for people to get to where they want to get to. As I get older, I think what you do throughout your life is collecting memories. That's the main focus of why you go from A to B."