Property values have risen steadily across Canada in recent decades, giving retirees who own their homes some extra financial cushion for their golden years.
“It’s not uncommon for people to have most of their assets – well over 50 per cent of their net worth – tied up in their home,” says Jamie Golombek, managing director, tax and estate planning, at Canadian Imperial Bank of Commerce in Toronto.
“There’s nothing wrong with that,” Mr. Golombek adds, but he notes that retirees who don’t have enough savings in their registered retirement savings plans, tax-free savings accounts or non-registered investments may need to tap the value of their homes to fund their lifestyle, or cover large expenses such as a new roof, a new car, or health-care costs if they become seriously ill.
For these retirees, the options include borrowing against their property, either through a home-equity line of credit or a reverse mortgage, or to sell the home and buy a cheaper one or rent.
Here is a closer look at the pros and cons of each option for retirees who are house-rich, but cash-poor:
Home-equity line of credit (HELOC)
A HELOC is one of the most common ways retirees can generate income from the value of their home to cover expenses, owing to its flexibility and relatively low interest rate. A HELOC is a revolving credit, which means the money can be borrowed, then paid back, then borrowed again.
“The easiest thing you can do … is to get a [home equity] line of credit,” Mr. Golombek says.
Of course, borrowers have to qualify for a HELOC, which is why he recommends people get a maximum line of credit even before they need it, such as when they buy the home, have paid down the mortgage, and while they’re working and have a source of income.
“You don’t have to use it. It’s just there,” he says.
Rona Birenbaum, a certified financial planner and founder of Toronto-based fee-for-service financial-planning firm Caring for Clients, believes a HELOC is a better way of funding a retiree’s financial needs because the rate is usually lower than a reverse mortgage and you only borrow what you need.
“It means you’re only paying interest on the amount you’re using,” she says.
A downside to having a HELOC is the immediate access to the funds, which could inspire some to withdraw more than they need.
“It’s not for people who lack self-discipline, whereby they might set it up to get the roof done, then they start spending willy nilly,” Ms. Birenbaum says. “For them, having access to the money could be a danger.”
A reverse mortgage allows homeowners aged 55 or older to borrow against their primary residence without making payments against the loan until it comes due – usually when the owner moves, sells the home or dies.
Reverse mortgages draw criticism because they typically carry higher interest rates than conventional mortgages or lines of credit, and there are penalties for early repayment, as well as requirements to keep the house in good shape.
Still, it’s a good option for some retirees, including those who don’t qualify for a HELOC, says Warren MacKenzie, head of financial planning at Optimize Inc. in Toronto. “It’s a great way to allow you to stay in your home.”
While the interest rate is higher than a more traditional loan, Mr. MacKenzie says the home’s value will likely continue to appreciate over the long term, which is a benefit for the owner.
“You still have the inflationary protection and the interest you pay is only on the amount you borrow,” he says, which is up to the individual homeowner.
Ms. Birenbaum says an advantage of the reverse mortgage is the ability to access the equity in a home without regular payments.
“It’s the only kind of borrowing where you get the cash and you have no obligation to repay it, as long as you live in the house,” she says, but also cautions homeowners about the higher interest rate.
That said, Ms. Birenbaum expects reverse mortgage interest rates to get more competitive in the future as more lenders enter the market.
HomeEquity Bank dominates the small reverse mortgage market in Canada through its CHIP Reverse Mortgage product. Equitable Bank is newer to the category.
“I think the rates and product features are probably going to get better than they are today,” she says.
Sell and downsize – or rent
Selling the primary residence and downsizing to a smaller house or condo is a big trend with retirees today, Mr. Golombek says.
Retirees can use the tax-free profit and invest it to help fund their retirement needs and wants.
“If it’s something you want to do ... you have to get over the memories and the emotional part of it,” he says.
A more dramatic move may be to sell the primary residence and rent, which is also an emotional move for some, Ms. Birenbaum says.
“It could be more cost-effective than borrowing, but it means you have to leave your beloved home,” she says. “It’s not just that you’re not in your home that you’ve been in for years, but you may feel less rooted.”
The risk of losing the rental either to owners who plan to take over the space or if the property is up for redevelopment can be unnerving.
“That kind of uncertainty is not helpful [for seniors],” Ms. Birenbaum says. “It’s definitely something you have to navigate and deal with,” if you decide to sell and rent.