How securities-backed lines of credit help with buying a home in retirement

Summary

• Banks struggle to approve mortgages for retirees—even those with millions in investment accounts—because the approval process prioritizes predictable income over portfolio assets.
• For retirees who want to close on a new home before selling an old one, a securities-backed line of credit (SBLOC) can serve as a bridge loan. It allows them to borrow against taxable investment accounts with no income verification and no origination fees, with an approval process of two to three weeks.
• SBLOCs enable retirees to purchase homes without having to liquidate investments, which could disrupt their investment strategy and trigger capital gains taxes or income taxes.

The downsizing dilemma

For many retirees, downsizing from a suburban family home to a more manageable condo or apartment makes financial sense. But there’s often a catch: Even with substantial retirement savings, getting approved for a mortgage can prove difficult when you no longer have a regular paycheck.

Evan Potash, a TIAA executive wealth management advisor in Newtown, PA, sees this problem a lot with retired clients. “They want to downsize and pull the equity out of their home,” says Potash. “But they don’t necessarily want to sell the old home first.”

It’s more a timing problem than a money problem. Retirees want to buy before they sell in order to avoid the stress of temporary housing or the pressure of contingent offers that can make them less competitive buyers. Yet traditional mortgage lenders often struggle to approve loans for retirees, even those with millions in investment accounts.

The challenge stems from how lenders evaluate mortgage applications. Lenders look at debt-to-income ratios and want to see predictable, sustainable income sources like paychecks, pensions, and Social Security.

Investment portfolios don’t carry the same weight as income on a W-2 because stocks, bonds, and mutual funds aren’t predictable. “What if the market goes down 40%, like in 2008, and your $3 million in collateral becomes $1.8 million?” Potash explains.

Even when retirees do qualify for a mortgage, the approval process can take a month or two. The timeline is similar for a home equity line of credit (HELOC).

A faster, simpler solution

As part of a referral agreement with The Bancorp, TIAA recently expanded availability of a securities-backed line of credit (SBLOC) referral program to help address this problem. The product, which became available to all TIAA Wealth Management clients in September, allows retirees to borrow against taxable investment accounts held with TIAA.

“There is no income verification on The Bancorp’s SBLOC program,” explains Chris Eller, a TIAA senior vice president and head of trust strategy and product development. “That’s beneficial for somebody who’s retired and maybe doesn’t have enough of an income stream. They utilize the securities as collateral instead.”

The application process requires minimal paperwork and documentation. It also moves quickly, typically completed in two to three weeks, according to Eller. There are no closing or origination fees with SBLOCs—unlike with most mortgages and HELOCs—nor are there annual maintenance fees or prepayment penalties. The line of credit can remain open indefinitely, even sitting idle for years until needed. Interest is charged only on amounts actually borrowed, and clients can pay down the balance at any time.

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