Financing purchases is something that becomes second nature to us over our lifetime. Between buying homes and vehicles, perhaps a business or cottage, or even doing renovations, you’ve likely applied for credit numerous times over the years.
What tends to surprise many retirees is how much harder it is to get credit financing once they’ve retired. What gives with the sudden difficulty borrowing?
You may have heard of the “5 C’s” of borrowing before: credit score, capacity, collateral, character and conditions. They all have a role to play in how lenders and financial underwriters justify a loan.
When you’re working, lenders tend to have a very easy time identifying your capacity to borrow. It’s your paycheque. The confidence in lending is directly correlated to their confidence that your income will remain consistent.
When you retire, your income now comes from a number of sources. It may include Canada Pension Plan and Old Age Security, a work pension, RRIF payments, annuities, account redemptions and more. Some of these income streams aren’t viewed the same when put under the microscope of a lender. RRIF payments, for example, can be easily manipulated up or down and the account value can fluctuate as well. Lenders are less confident in recurring income when that income
source isn’t guaranteed.
The second big hurdle can be collateral. Many retirees’ biggest assets are their retirement accounts. What some don’t realize is that registered accounts (think RRSPs or LIRAs) can’t be used as collateral. Regulation prevents lenders from foreclosing on a registered investment account, so it can’t be collateralized to support your borrowing request.
What can a retiree do to help with financing? If you have a low-cost line of credit before you retire, consider keeping it open. If you don’t have one, consider getting one. This can give you some financial flexibility without the need to do a new application once you’ve retired. Also consider consulting with a financial advisor or mortgage broker, before you retire, to plan out any major capital expenditures in your future plans. They may be able to give some great insight on how to keep your options open, even after your regular paycheques have stopped coming in.
Borrowing in retirement is definitely tricky. Like most things with retirement, planning early can help alleviate the challenges that come with navigating the financial landscape ahead of you.
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