Colourful houses in St. John's, Newfoundland, on June 25.Adrian Wyld/The Canadian Press
A home is typically the most valuable possession Canadians will ever have, so as they approach retirement age, many may wonder whether they should factor its value into their financial planning.
While the majority of senior homeowners own their property outright, the share of mortgages being carried by people aged 65 and older was nearly 14 per cent in March of this year, according to data provided by Canada Mortgage and Housing Corp. That compares with 10 per cent in 2017.
The cost of servicing those mortgages has skyrocketed after the Bank of Canada started raising rates in March, 2022, in its bid to curb inflation. Canadians are now leaving the work force at a time when interest rates are at their highest levels in decades.
That’s not the only major costs some retirees are facing.
“You also have seniors who have been trying to help their children with a down payment to a house or by paying off some of the student loans; all of these are being absorbed into their own retirement plans and therefore they don’t have a lot of money that they can just put towards reducing their own mortgages,” said certified financial planner (CFP) Zainab Williams with Elleverity Wealth Management.
Traditionally, financial advisers have cautioned against relying on home equity – which is an illiquid asset and costly to turn into cash – to fund their retirements. But without adequate savings to support their golden years and amid soaring costs to service mortgages and maintain their properties, some retirees may find that leveraging the value of their home may be their best option.
There are a few factors to consider when deciding whether to unlock some of the value of your home in your retirement plan: Do you own it outright or are you paying off a mortgage? Do your registered savings and other investments support positive future cash flows? Do you have funds set aside to cover potential elder care needs?
If expected cash flows are negative, then it makes sense to factor your home into the retirement equation, said Sheldon Craig, CFP with Craig Consulting in Osoyoos, B.C. If someone’s registered retirement savings plan (RRSP), for instance, “runs out at 75, they may want to make a decision a few years prior to running out of money, say at 70 or so,” he added.
There are several options for doing so, the most obvious being to sell the home. But that strategy comes with caveats. Seniors need to consider the associated costs with the sale such as transfer taxes, commission, legal fees and other disbursements, Ms. Williams said.
An even more important consideration is the question of where to live after selling. Many seniors have been struggling to downsize because of a lack of suitable retirement housing and pricey rents for smaller alternatives, aside from the emotional challenge of leaving a home they may have lived in for a large part of their lives.
“Downsizing doesn’t necessarily mean less cost,” said Burlington, Ont.-based CFP Ty Cooke at Richardson Wealth. However, he said it can provide a more convenient lifestyle to seniors who become renters and no longer have to deal with the hassle of maintaining a property.
Seniors living in large homes with spare bedrooms could rent out those rooms if comfortable with sharing common spaces with strangers, suggested B.C.-based CFP Julia Chung with Spring Financial. She said one of her clients is currently leasing the basement of her home to people in their 20s who are saving up to buy the house from her eventually. After that, she’ll move from British Columbia to Alberta, where housing is generally cheaper.
Mr. Craig suggests the possibility of negotiating a leaseback, an arrangement in which the homeowner sells the house to an entity who then leases it back to them.
Another option is to take a loan against the value of a home. But with the recent rise in interest rates, clients are not as comfortable doing that, Ms. Chung said.
A home equity line of credit (HELOC), which allows one to borrow up to 65 per cent of a property’s value, is recommended to those who consider themselves responsible with credit and are able to pay interest monthly, financial planners said. The homeowner has to make regular payments to cover just the interest portion, and the loan can be repaid when the house is eventually sold.
Another approach to raising funds is a reverse mortgage, which lets a homeowner borrow up to 55 per cent of the value of their home and is only payable when the borrower sells it or dies. While the borrower does not have to make any periodic payments, the amount of the loan and accumulated interest deplete your home equity over time. Interest also tends to be higher than for HELOCs.
This option is typically recommended to those who can’t make the frequent HELOC interest payments, sell or rent part of their homes, Ms. Williams said. If you are not concerned about leaving your home as part of your inheritance, then a reverse mortgage may be suitable, she added.
Mr. Craig described relying on reverse mortgages and HELOCs as a “last-ditch” approach, given the unpredictabilty of borrowing costs.
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