CWG Insight Series: Home Buying in Retirement

The dream is to get to retirement with no debt, right?  Having your house paid off means lower monthly expenses and therefore a lower monthly income need.  From a behavioral standpoint, that equates to more freedom.  While this is the dream, it’s not always the reality, especially for many of our clients looking to retire early in their 50’s.

What happens if you want to move to another state, or just a new home in your area and you need a mortgage?  While you’re working and have active W2 wage income coming in, this is pretty easy.  What about when you’re on fixed income living on Social Security, annuities, pensions and investment income?  Things get a little more complicated.

You can have a high level of assets, but most traditional banks are looking for income.  This can prove frustrating as a potential buyer.  Lenders generally will look at your last two years’ of tax returns to see what your income history has been.  Depending on the loan amount, you might not qualify at your retirement income level.

The good news is there are still a few options for getting a traditional mortgage: 

• Increase your retirement account distributions for the 2 year prior to, and the year you are applying for the mortgage.  You may not need the income so you are going to paying more in taxes then you would normally.  This option really only works if you are at least 59 ½ and have 2 years before you want or need the new home. 

• Some banks will potentially qualify you for a mortgage based on your assets in a brokerage account or IRA.  The lender applies a formula to the money in your account — generally using 70% of the value of the account — to determine whether it could stretch long enough to cover mortgage payments for the life of the loan.  Essentially, determining what your income from the account could be.

If neither of those options work, we have some creative ways to secure lending on a purchase like this, or any large loan for that matter. 

• Take a margin loan against your taxable brokerage account.  Basically, brokerage firms may lend you money against the value of your portfolio — called borrowing on margin — whether you use the money to purchase securities or something entirely unrelated to investing.  While such loans come with risk of a “margin call” — you could be asked to add money to your brokerage account if the value falls below a certain amount — the interest rates on margin loans are generally more favorable than those for mortgages or other types of borrowed money.   Right now we are seeing these rates below 2%.  The rate is variable, the minimum monthly payment is interest only and there is no set payback period.  

• The other option is to “pledge assets” in your taxable brokerage account with a Securities Backed Line of Credit.  This also involves taking a loan against your brokerage account, and the assets are used as collateral.  Yet unlike margin loans, you cannot use the money to purchase securities.  The rate can be fixed or variable and there is a set payback period.

It’s worth noting that the interest paid on these loans can often be deductible against portfolio income (interest and dividends).  It’s not deductible on Schedule A like a traditional mortgage, but in many situations the tax benefits can be similar.

As you approach your retirement goal, your Crown advisor will be there every step of the way, planning far ahead of time to ensure you’re in the best position possible.  If things change suddenly, our dynamic planning can quickly adjust and find the best solution for your new situation.   It’s what we are here for so rest easy, we’ve got your back.

Nick Kolbenschlag - Chief Executive Officer & Co-Founder