Is it OK to borrow in retirement?

You might think that your one goal after retiring is to save every penny and pay off all your debts. But that’s not necessarily the whole story. Even in retirement, borrowing can be a thoughtful move for your finances and personal wellbeing.  

Whether you’re interested in funding lifestyle pursuits, investing your equity to build a legacy, paying off higher-interest debt or making a large purchase, you have options, including a home equity line of credit, or a HELOC. 

What’s a HELOC? 

A HELOC lets homeowners borrow against the difference between their home’s market value and the remaining mortgage balance. If you’re not carrying a mortgage, it’s just borrowing against the home’s value.  

What can you use a HELOC for? 

The best uses for a HELOC promise both financial and personal returns:   

• Home improvements for increased market value 
• Pursuing passions as low-risk business ventures 
• Medical expenses that improve quality of life 
• Tuition to grow income-generating skills 
• Strategic retirement investments for higher yields  

How does a HELOC differ from a HEL? 

Both use home equity as collateral but differ in operation: 

Home Equity Line of Credit (HELOC)  Revolving credit, like a credit card  Access all or some funds as needed   Variable rate only  Borrow up to 65% of home’s net value  Flexible repayment plan

Home Equity Loan (HEL)  Installment credit, like a car loan  Receive a lump sum  Variable or fixed rates  Borrow up to 80% of home’s net value   Established repayment plan

How does a HELOC impact home value? 

A HELOC doesn’t directly affect your home’s appraised value, but its credit limit is tied to your home’s worth—you’ll need to manage it responsibly. Significant declines in home values may prompt limit reductions to prevent excessive borrowing.  

 

Should you leverage your home equity?  

Only if you're comfortable doing so, and have a plan to play it back. Borrowing in retirement can be a helpful tool to fulfill your goals in life's glory years, but it needs to be handled appropriately. The Canadian Foundation for Financial Planning reports that 42% of retirees are uncomfortable using home equity to increase their standard of living.  

A perk of homeownership is being able to tap into equity at a low interest rate, even for retirees. As surging home values increase the allure of home equity loans and lines of credit, seek advice on key factors—such as retirement income, economic outlook, and impact on estate—before borrowing in retirement. 

A case study: Kate and Sal 

Kate and Sal want to update their bathroom and driveway, an estimated cost of $23,000. Even with Sal’s OAS benefits starting next year, saving for the renos will take a while. Kate uses a loan calculator to discover that, with less than $400,000 owing on a $1.5 million home, they have ample equity to ensure various borrowing options: 

	HELOC	HEL (fixed)	HEL (flex)	Credit card
Term Rate	7.7%	9.24%	9.74%	19%
Min. monthly interest	$128.33			$400.00
Monthly 5-year repayment	$402.66	$417.50	$422.39	$521.00
Interest*	$4,159.77	$5,050.03	$5,343.21	$11,260.00

*Based on 60 regular monthly payments at posted rates as of Dec 1, 2023. Does not include annual fees. 

In this scenario, a HELOC stands out with lower interest and flexibility. They opt for a $20,000 limit and plan to automate payments once Sal gets his pension boost.   

When shouldn’t you use a HELOC? 

From the interest comparison above, a HELOC appears to be a prudent choice for consolidating high-interest debt. You’ll want to avoid using home equity to mask poor spending habits, like maxed-out credit cards, as it seldom improves your financial situation. Address the root cause of debt consolidation. 
 

What are my loan options? 

Secured loans guaranteed by an asset— like a car loan, reverse mortgage or home equity loan—offer lower rates and are easier for retirees to obtain. Unsecured loans or credit cards pose higher risks for both you and the lender, and have higher interest rates. 

 

Does borrowing affect my pension? 

Borrowing doesn’t directly impact CPP or OAS benefits. If you borrow and earn income on that money, perhaps by investing or purchasing a rental property, that additional income could reduce your OAS benefits.

Can you borrow from your pension? 

You can’t borrow directly against CPP, OAS or locked-in RRSPs, but their payments can serve as proof of income for your loan application. That income will factor in with your credit history, total debt and loan size to determine if your lender will grant you the loan.   

 
Just like all solutions, it’s all about how they’re used. Home equity loans, when used wisely, are nothing to fear and can be a great low-interest borrowing option in retirement. Book an appointment to find the right borrowing solution for you.