Finding Freedom Week 27: Financing A Vacation Rental In Retirement

Ok – remember back in our 5 part series on transitioning to retirement when I talked about how I recommend that anyone looking to retire should secure as large of a home equity line of credit as possible? I wasn’t joking. We just verified that financing a vacation rental in retirement can be more than a little bit tricky.

Here’s the thing – banking institutions get very weirded out when you tell them you are in your mid-thirties and “retired”. They don’t like it.

Not one little bit.

Here’s What Happened When We Tried Financing Our Vacation Rental

After having zero debt for the past couple years, it felt a little bit weird to be going back into our bank and asking for a mortgage. Even if it was for an investment property.

We met with a banker at our local branch, and the initial meeting was all good. We’ve held the majority of our asset’s with the same institution for quite some time, so we felt we had a pretty good relationship. All our income streams feed through their accounts, so they have access to an ample track record of our post-retirement income.

Not to mention we provided them with all the typical financing docs. T1’s, external account statements for the last couple years, etc.

Everything we provided them showed a consistent track record of us having eliminated debt, established a high savings rate, and most importantly, making a very consistent income stream that more than supports the debt servicing we were looking for.

Our mortgage advisor was happy with the file. He assured us that he would apply for an aggressive rate exception, and provided us with a subject removal date that he felt would give him ample time to secure our financing.

All seemed liked it was going well.

*We had even proactively gone into the bank earlier in the summer when we were looking at properties. We had gone through all our finances with the same mortgage advisor, and obtained pre-approval for our budget amount. We thought we had our ducks in a row.

Until The Big Guys Got Involved

Like most of the major banks in Canada, mortgage applications still need to be escalated and approved via their central mortgage departments, even when they aren’t a high ratio mortgage that requires insuring. This seems in large part to be due to the increasingly strict regulations on mortgages and debt servicing rates.

Which I am all for. Debt to income ratios are higher than ever, and that’s a long term problem for this country as a whole.

Except that the need to go through the mortgage department translated into a big hurdle for us.

As soon as our file went to people who didn’t know us, or our circumstances – they pumped the brakes. Hard.

Retired. In their thirties? What?

Suddenly our mortgage “advisor” (read sales person) was letting us know that “headquarters” simply didn’t believe that we would be entitled to our pensions for the duration of our life. I mean, I’m not sure how they think most government defined benefit pensions work – but it was indeed a lifetime monthly payment.

Our pension documents said it. The website outlining the pension clearly stated it.

Nope. Insufficient.

They weren’t going to count our pensions as income unless we could provide signed, currently dated letters from our pension centre indicating that it was indeed payable for life. Normally, this would not be an issue. Except that they had raised this concern 10 days into the 14 day window we had to remove subjects. And only 3 of the 4 remaining days were business days.

Hmm……..signed income documents from a pension centre on the other side of the country, in 3 days, at Christmas time.

Good luck with that.

Nonetheless, we submitted an urgent request and notified our mortgage advisor that this was unlikely at best.

Now What?

Not surprisingly, those letters didn’t come through. So, even with all our assets and additional passive income sources, they wouldn’t approve us for the financing until they were satisfied with these income sources.

But the subject removal date had arrived. Crap. What to do?

Fortunately for us, we had gone and secured a rather large home equity line of credit against our primary residence. shortly before we had retired. We didn’t intend to use it, but we had wanted it as a “just incase”. For instance, just incase we saw an investment opportunity that required quick action. One where obtaining traditional financing would take too long.

Turns out – this ended up being exactly that. We knew we wanted to go through with the deal, and between our existing HELOC and planned down payment amount, we had ample funds to cover the purchase.

So we went ahead and removed all subjects.

Big Banks Can Be Painful

It took the bank two additional weeks of Mickey Mouse antics before we actually had things in place. BUT – ironically in the end, we decided to keep the purchase on our HELOC. The bank offered us an interest rate of 2.75% for a 5 year term if we fixed the amount within our HELOC, including all the usual pre-payment terms we look for.

Less than the 2.89% we would have obtained on a traditional, secondary property mortgage. Especially since we weren’t a high ratio mortgage that would be insured by CMHC.

In addition to the lower interest rate, by utilizing our HELOC, we avoided having to put the 35% (or higher) downpayment most Canadian banks require for a secondary property, minimizing the amount of capital we would have to tie up in the property.

Definitely a win-win from our perspective.

Why Didn’t We Shop Around?

Well – we did. But we ran into the same problems everywhere. Banks seemed to get wary when we told them we were retired, stretching out the anticipated vetting process far beyond the time frame we had available to us.

And with the property being a secondary property, the quoted interest rates were higher, and downpayment ratio even more so.

Who Knew Financing A Vacation Rental Would Be Such a Pain?

Ok – I have long know that financing in retirement is more of a challenge. But with the asset’s and income streams we’ve established, comparative to the property amount, I truly thought this would be a non-issue scenario.

Not so.

Had we not had the HELOC available to us, we would have had to request a subject removal extension. Which would have opened up the contract, allowing the vendors to walk away, or accept any other offers waiting in the wings. Leaving us to keep hunting for ANOTHER perfect property.

So – definitely, definitely, definitely make sure to obtain as much credit as you can BEFORE you retire. You can always reduce the amounts at a later date, but increasing them QUICKLY may prove to be much harder than you think.