Is your home your retirement plan?
Author: Sound Choices
July 18, 2018
The content in the below article is meant for Canadian investors only.
In this series of articles, we discuss how investing in real estate over equities is not as black and white as many people would believe. Today, we’re examining the potential risks of using your home to fund your retirement.
Given how house prices have risen and how much of the monthly budget is taken up by a mortgage payment, it’s understandable how Canadians have come to this decision.
But what else do you need to take into account?
#1: Household debt
Funding your retirement with your home assumes that your house is paid off before. However, a recent survey found that 20% of Canadian retirees are still making mortgage payments.3 How would you handle these payments when you don’t have the same cash flow?
#2: Options for freeing up your money
Are you ok with selling your home to access the money invested in it? A number of retirees aren’t. Why? An emotional attachment or a desire to leave it to a loved one.
Freeing up enough to fund your retirement may mean downsizing or even moving to a more affordable community – which may be some distance away from where you currently live. If this is your plan, remember to include transaction costs, including realtor commissions, legal fees, land transfer taxes, and moving expenses.
Discuss the pros and cons of a reverse mortgage, which may also free up some home equity. Read the fine print carefully. Consider the higher costs compared with a traditional mortgage and the fact that you may not be able to pass the home onto your estate or allow someone else to assume the mortgage.
Last year, oil prices affected house values in Alberta and, in March 2017, there were more than 2,000 houses and condos vacant in Calgary – the biggest inventory on record!4 Those ready to retire were playing a waiting game… or they may not have received the price they were expecting or planned for.
This situation may not be unique. The housing market is cooling down across most of the country. Existing home sales declined every month this year to reach their lowest level in five years, with Vancouver and Toronto recording the biggest drops (35% and 23% respectively). Higher interest rates, tougher mortgage rules, non-residents buyers’ tax and lower affordability are all factors.5
#4: Living expenses may go up not down
Health-related costs can add up fast. Your health-care coverage may not be enough to fund additional health-care and housing needs.
A chronic or acute illness that negatively affects your ability to live independently can strain your finances. Potential costs include assisted-living facilities, home health aides, and personal care workers. If you stay in your home, you may have to finance modifications such as equipping bathrooms with grab bars, or even accommodating wheelchair access.
Housing may, in fact, become the largest expense you have in retirement.
Talking to a financial advisor can help you decide if your home is the right solution for funding your retirement.
1Source: BMO Financial Group, January 2014, Pollara survey of Canadians 18 years of age and over, November 2013.
2Source: Investing As We Age, Investor’s Office, Ontario Securities Commission, 2017.
3Sun Life Financial Barometer, February 2018.
5Source: Canadian Housing Update: Climate Change, BMO Capital Markets, June 29, 2018.
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