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Should Your Retirement Plan Depend On Your Home’s Equity?

By Nest Wealth on 19/07/2018Article 6 Minute Read

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Guest Post By: Penelope Graham, Zoocasa

Owning a home is arguably the largest financial asset for many Canadians – but should it also be the main contributor to their retirement plan? After all, with a history of strong price appreciation, housing is generally seen as a stable, long-term investment with the potential for huge gains.

That’s certainly the case for today’s boomers who have held onto their Toronto real estate over the course of decades: the average home price in 1980 was $75,694, according to the Toronto Real Estate Board – literally 10 times less than the average price of $807,871 recorded this June. Such a homeowner has enjoyed a property value appreciation of over $700,000 over the course of that timeline.

For those sitting on such a gold mine, it can seem extremely tempting to rely on those returns when planning for retirement – in fact, 45 per cent of Ontarian homeowners over the age of 45 are doing just that, according to a 2017 study conducted by the Ontario Securities Commission.

However, there are risks involved for both those entering their retirement years and today’s new homeowner, who may model their own financial strategy on what has worked for their parents. So, should one’s home equity factor into their retirement plan?

The Cream on Top

The short answer is, yes – or at least, part of it. While a well-diversified portfolio of passive investments, combined with CPP contributions and perhaps a workplace pension, remain crucial components of retirement planning, the ability to tap into one’s home equity can equal greater enjoyment in the early retirement years, and ensure quality of life in the later ones.

However, real estate isn’t exactly a liquid investment, and while there are a few common methods used for pulling out your cash come retirement, they each come with their pros and cons.

Here’s what to keep in mind when factoring your home’s equity into your retirement plan.

Should You Downsize?

The most straightforward way to access your home’s equity is to sell it and invest the proceeds in either lower-cost housing or even a rental. Cashing in high-priced detached suburban homes for bungalows or condos in downtown Toronto can make a lot of sense from both a financial and mobility perspective. For those early in their homeownership journeys, that they will eventually sell the family home decades later may seem a safe assumption – but they’ll likely feel differently when the time comes.

A whopping 93 per cent of Canadian seniors recently polled by Ipsos on behalf of HomEquity Bank (a provider of reverse mortgages) say they want to age in place. The survey also confirms a correlation between this sentiment and age: 68 per cent of 35 – 44-year-olds indicated the same, which grew to 79 per cent of the 55-64-year-olds polled.

As well, while Canadian real estate is generally stable investment in the long run, it can experience patches of extreme volatility that, if exposed, can be very detrimental to a senior looking to sell. For example, take the market conditions in the Greater Toronto Area following the Ontario Fair Housing Plan last spring: prices for average Toronto houses for sale plummeted 18 per cent from March 2017 (which we now know was the market peak), to December of that year, wiping out an average of $224,552 in equity. While the market is now on a modest uptick, the average house price in region remains 15 per cent below that high, representing a loss of $178,908. For boomers who missed the window to sell their long-held houses, the timing has been horrendous.

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Taking Out a HELOC

For those who have paid off a good chunk of their mortgages, one option for that accumulated equity is to turn it into a Home Equity Line of Credit. This option allows homeowners to access up to 65 per cent of their home’s equity, paid at a floating variable interest rate based on Prime. A HELOC has similarities to a credit card; the debt is revolving, meaning it can be kept open as long as the homeowner likes, as long as the interest payments are made.

HELOCs tend to have cheaper borrowing costs than second or reverse mortgages, and are a popular method for accessing cash for lump-sum expenditures, such as remodeling the home, taking a vacation, or covering an unexpected expense. However, because borrowers must qualify based on their credit score, it can be more challenging for those already retired without regular income to qualify for a HELOC and, in some cases, the entire loan could be called by the lender should a borrower’s credit-worthiness change significantly while the HELOC is open.

What About a Reverse Mortgage?

A reverse mortgage is becoming an increasingly popular route for seniors who want to tap into their equity, but wish to remain in the family home. They essentially allow the borrower to turn their accumulated equity into an income source, the debt of which is capped at the value of the home. While more expensive in terms of interest rates, one of the attractive draws of reverse mortgages is that a dime doesn’t need to be paid on the debt until the home is sold, or the homeowner passes away. However, as interest charges accumulate over time, this runs the risk of eating up all of the home’s equity, and leaving the estate bare.

Diversify for your Golden Age

When it comes to factoring your home’s equity into your retirement plan, the golden rule of investing applies: don’t put all your eggs in one basket. It’s always a great idea to connect with an advisor or investment expert to ensure your portfolio is well-diversified, avoids volatility, and is designed to perform well over the long-term.

 

Penelope Graham is the Managing Editor of Zoocasa.com, a real estate website that combines online search tools and a full-service brokerage to let Canadians purchase or sell their homes faster, easier and more successfully. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.