Can someone buy a house on a limited pension?

By Joe Curry, CFP, president of Matthews + Associates and host of the Retirement Planning Simplified podcast.

As told to Gary Parkinson.

Here is the answer to this week's reader question.

I’m retired and living on a fixed pension. Is it even realistic to think about buying a home, or has that ship sailed?

—Sandra

Can you get a mortgage on a pension income?

Canadians approaching or already in retirement often assume that without a regular employment paycheque, the door to home ownership has closed. In reality, lenders look at pension income more favourably than many people expect. Whether it’s a defined benefit pension, Canada Pension Plan (CPP) or Old Age Security (OAS), that income is assessed in much the same way as a salary. In some cases, pension income may actually work in your favour.

Typically, pension income is treated the same as employment income by lenders. Some financial institutions even consider pension income more secure because it doesn’t disappear if the economy turns or you lose a job. It’s fixed income.

Lenders will examine your total assets alongside your income, which helps retirees with accumulated savings, investments or home equity. For those with limited income but significant assets, some lenders offer niche mortgage products that can finance up to 50% of a home’s value based on equity alone. Every situation is different, and the options available to you will depend on the complete state of your finances.

There’s no magic number, but there is a reality check

One of the greatest challenges for retirees is determining whether pension income is enough to qualify for financing. The honest answer is that there’s no universal threshold that makes home ownership wise or unwise. Simply put, Canadians living on pensions should budget for the total cost of owning a home, including line-item expenses that don’t naturally come to mind.

Most financial plans account for the mortgage payment. Far fewer consider what comes after those initial payments, such as property taxes, home insurance, and the steady drumbeat of maintenance that every home demands. That last item tends to catch many retirees off guard.

People often overlook the ongoing costs of homeownership. Maintenance alone, such as roofs, furnaces, plumbing—these expenses can run between 1% and 3% of your home’s value every year. On a $500,000 home, that’s potentially $15,000 annually. Your annual budget must reflect the true costs of home ownership, so you’re not caught off guard by unexpected expenses.

Living on a fixed income means your financial flexibility is more limited. Annual costs, including those related to a home, are harder to maintain than for people still earning, and that’s the tension at the heart of this question.

When renting might be the smarter call

If you’re determined to buy real estate, another critical factor in your decision is to evaluate the true costs of homeownership against your broader financial goals. Homeownership is a values-based choice as much as a financial one, and everyone has different values that are important to them.

Don’t forget to ask yourself these questions: 

• Do you want to travel in retirement? 
• Will you still support your family financially?
• Are you planning to see your children and grandchildren often? 

A mortgage and the underlying costs of homeownership may constrain those options in ways that aren’t immediately obvious when you’re solely focused on the purchase price.

Many Canadians feel that owning a home in retirement provides stability, security and a sense of belonging that renting simply can’t offer. However, have an honest review of your fiscal situation and your financial future. Evaluate whether renting versus buying supports your goals and personal cash flow before signing anything.

You can start by speaking with a certified financial planner who specializes in retirement income to weigh the options that lie before you. The decision is yours to make, but ensure that decision is grounded in real numbers that account for whether buying a home will let you live the retirement you've planned for so long.

Gary Parkinson is a Toronto-based journalist with over 15 years of professional experience covering personal finance and money management matters.

Read more from this issue of The Get:

1. Can you bring food to sports and concert stadiums in Canada?
2. How death and grief can affect your finances 
3. Ever played LUG Sports? Find out about its CEO, Ethan Wright
4. Buyer or seller: How to make deals at garage sales