Getting credit when retired can be difficult

Hey there, time traveller!
This article was published 02/11/2020 (1840 days ago), so information in it may no longer be current.

Dear Money Lady,

I am a pensioner and own my home.  I have no debt, and wanted to get a line of credit from my bank to help out my daughter and maybe do some upgrades to my home.  I went to my bank and they said I don’t qualify. I couldn’t believe it. I have been with the same bank for over 30 years. What can I do now?

Janice M.

Dear Janice,

I’m sorry you were declined by your bank. This is becoming a very common thing for older clients who have been loyal to their banks for many years. The fact is, the banks are very different now and it is no longer enough to just own your home and have no debt.

Prior to 2018, you could easily get an equity loan or line of credit based solely on the value of your primary residence. Not now. The banks are now mandated to show income to mitigate risk. You must show enough income to qualify for the new loan in addition to any other debts or liabilities you pay for monthly. That means banks will now need to account for property tax payments, heat/hydro costs, condo fees, car payments and any other outstanding monthly debt to ensure that you can sufficiently pay these expenses plus the new loan payment.

The problem is, most pensioners report very little income in retirement and subsequently will now not qualify for a new loan or line of credit, even though they probably could easily make their payments and would never dream of defaulting on the loan.

Those of you who may be retired but still have a secured line of credit that you opened when you were working should make sure you use it periodically to keep it active. You certainly do not want to have to apply again when your income has decreased. Hopefully your bank won’t close it due to inactivity, which also seems to be on the rise.

If you have been turned down by your bank, there are a few other options to consider.  You can reapply with your daughter and use her income to help qualify. Of course, the bank would also take into account your daughter’s liabilities together with her income, so hopefully she has enough income to cover the monthly payments.

Another idea is to get a margin loan on your investment portfolio. Most investment firms offer prime rate margin loans which allow clients to use their investments as collateral and to pay only the monthly interest payments on the balance drawn down.

If that doesn’t work, you can still find some lenders that will do “true equity lending” without using income to qualify. These lenders are typically credit unions and B-lenders.  They will usually offer loans up to 65 per cent of the appraised value of your property less any outstanding mortgages. They offer a very good product selection but — because they are approving the deal without income — they will charge a slightly higher rate than the Big Five banks.  

Christine Ibbotson is the author of How to Retire Debt Free and Wealthy. If you have a money question, please email her through her website at: www.askthemoneylady.ca