Last week in this newsletter, I said that relying on your home to pay for your retirement is a bad plan. But what about using home equity to pay for the latter stage of retirement – the years when you need long-term care?
Long-term care is as unappealing a topic as there is in personal finance because it forces us to confront that fact that we may reach a point in life where we can no longer look after ourselves. Still, we need to plan for the cost of long-term care. People are living longer, which means more likelihood of dealing with dementia or health conditions that leave them at least partially disabled.
You could sell your home and use the proceeds to pay for a long-term care home or, if you’re able to live somewhat independently, a retirement home. If you prefer to stay in your family home, it’s possible to tap your equity to cover the considerable costs of home care and retrofitting your house.
A home equity line of credit is an easy way to pay for these costs, but there are two issues to consider. One is that it can be impossible to set up a HELOC if you’re retired and not earning employment income any longer. It’s best to set up a HELOC in your working years and keep it around while in retirement. The other issue with HELOCs is that you must make minimum monthly payments of interest owing. You can pay down the principal at your discretion.
Another way to turn home equity into funds for home care is a reverse mortgage, where you borrow against your home equity and repay both principal and interest when you sell or die. The interest rates on reverse mortgages are higher than HELOCs at between roughly 6.99 and 9.65 per cent. At these rates, interest can compound quickly on your reverse mortgage and erode the amount you have left after you sell.
Where do financial planners and financial advisers stand on using reverse mortgages for long-term care costs? I asked this question on LinkedIn and received a strikingly diverse range of answers that are well worth considering if you’re thinking about long-term care costs. Some planners say reverse mortgages are a last resort, while others say they’re a viable option for short periods of time.
A key point made in the planner responses is that long-term care costs are something you ideally plan for while you’re working. If you have a financial plan, paying for long-term care should be in there. If you don’t have a plan to pay for long-term care, a reverse mortgage has to be on your list of possible solutions.
Subscribe to Carrick on Money
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob’s personal finance reading list
What $1-million gets you in the housing market
Credit scores and car loans
An area where people have really upped their game in financial literacy is understanding the importance of credit scores. Now, a practical question. What credit score do you need to be approved for a car loan at a competitive rate? Answers here.
About those credit card rewards you think you have
An expert on credit card rewards is surprised to find in the fine print of one particular card that baggage insurance differs according to your age. People aged 65 and up get much less coverage than younger people.
Stocks vs. ETFs
A Reddit discussion on when it could make sense to buy individual stocks compared to passive index-tracking exchange-traded funds. The underlying issue here is that even professional money managers have a tough time consistently beating the indexes. That’s why index investing is increasingly popular. Now for a veteran financial blogger’s explanation of why he doesn’t invest in dividend ETFs. Here’s my own take on a flaw with dividend ETFs.
Q: I recently sold my house and I am considering building a new one. In a prior column of yours, you identified several banks that allow funds within a registered retirement income fund to be used to invest in property. Those funds invested could be repaid back to the RRIF in the form of a personal mortgage. Very few banks appear to offer this arrangement and the bank I deal with stopped offering it. Are there other banks or financial institutions that still offer this?
A: I’m throwing this one open to newsletter readers. Do you know of a financial institution that allows clients to hold a mortgage in their RRIF or registered retirement savings plan. Let me know at email@example.com.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Tools, Explainers, Guides and Charts
A list of Canadian bloggers who write about F.I.R.E. – financial independence, retire early.
The Money-Free Zone
I’ve been a fan of the Netflix show Formula 1: Drive to Survive since I first encountered it while packing for a move back in the summer of 2019. My new favourite sports show on Netflix is Tour de France: Unchained. A high-drama crash course in elite bicycle racing, and I do mean crash. They happen a lot.
Who I’m following on Twitter
Julia Longpre, who bills herself as having an “unhealthy obsession with Vancouver RE.” Bracingly scathing comments, with salty language.
What I’ve been writing about
– Five pro tips for investors trying to squeeze maximum returns from cash in their account
– Is the problem in real estate that houses cost too much, or that people expect too much?
– With soaring rents a plague on solo seniors, here’s how one Ontario woman fought back
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Why millennials and Gen Z are Alberta-bound for a more affordable life • Rising interest rates brought pain for new homeowners – and opportunity for house hunters • Why more Canadians are choosing to be child-free or delay parenthood • Love in the time of inflation: How to manage rising costs when dating • You’re not bad at money – you’re suffering from money shame • Retirement might look different for Gen Z and millennials. Here’s how to plan for it • Recession-beating tips for the job market, housing, investing and the cost of life • Is the middle class dead for millennials and Gen Z?
- ✔️ The housing file: A house isn’t special. Get your head straight about the reality of home ownership • The good, the sad and the unaffordable: Saving for a home down payment in Canada’s big cities • Property taxes are popping in some cities – how worried should you be about other tax hikes? • Our other real-estate problem – people have too much wealth tied up in houses • Borrowers and savers, here’s how to time the eventual rollback of interest rates
- 📈 Investing: Canada's top digital broker is TD Direct Investing, with an assist from the TD Easy Trade app • 2023 Globe and Mail ETF buyer's guide part one: Canadian equity ETFs • For the ultimate in cheap investing, check out the Freedom .08 ETF Portfolio • Yes, there is risk in Canadian bank deposits for the unwary and complacent • CDIC covers bank deposits, but who protects your investments if your broker goes bust? • Answers to your questions about the low-risk ETF paying almost 5% • Happy fifth birthday to one of the all-time best investing products for everyday people • An investing strategy that wins cleanly over the long term by outperforming in bad years like 2022
- 💰 Your money: Mortgage holders, savers and GIC investors, it’s time to change your thinking on interest rates • How much debt is each generation of Canadians carrying, and how do you compare? • For the sake of their financial futures, young people should leave Toronto and Vancouver • This practical new spin on a savings account might just peel you away from your big bank • Rental fraud grows amid rise in fake, falsified tenant applications • Are Canadians worse off financially now than in the 1980s? • From groceries to auto loans, here’s how much more it costs to live right now • When saving for retirement, should you change your asset mix over the course of your career? • Do retirement income needs always rise alongside inflation? Not necessarily • When the bank suggests you lock in your variable rate mortgage, it has an angle