If you are approaching retirement, you no doubt have given thought to how your home will factor into your finances once you find yourself on a fixed income. Here are a few things to consider in advance:
IF YOUR HOME IS YOUR RETIREMENT PLAN…TIMING IS EVERYTHING!
While Ontario’s real estate market continues to be sizzling hot, surveys estimate that up to three quarters of Canadians expect their homes to become their primary income source when they retire.
Over the past 10 years, this strategy has been a strong, reliable one. House prices have tripled, even quadrupled in some places, providing equity for homeowners beyond anything they could have imagined. Seniors who own their homes mortgage-free find themselves in an especially favorable position.
There are a number of ways to access the cash that is tied up in your home to help fund retirement goals. Each has pros and cons that must be considered.
Much has been said about reverse mortgages, which allow homeowners to stay in their current homes while freeing up cash. The money is tax free, the cost of borrowing is relatively low, and there is no need to repay the loan for as long as the borrower lives in the house.
However, some retirees may find that building up debt after fully paying off their homes creates a level of stress that is uncomfortable. Interest rates on a reverse mortgage tend to be slightly higher than regular mortgages, and penalties for canceling or paying out the loan early can be steep. Furthermore, if real estate values decline, the risk of borrowing more than the house will be worth on the open market at a future date must be considered.
SELL – RENT
A second option that has proven to be attractive to some has been to cash out of their homes completely and become renters. Even after expenses (mortgage payout, real estate fees, legal fees, moving costs) are paid, many retirees find themselves with a substantial nest egg that can be invested safely to provide a steady income, or a healthy supplement to an existing pension. Timing a sale to benefit from a healthy real estate market helps to maximize profits when using this strategy. (It should also be mentioned that an experienced financial advisor can provide information about investing the proceeds of a sale to help avoid unnecessary taxes, etc.)
SELL – DOWNSIZE
Perhaps the most popular option among healthy retirees and seniors who live independently is to sell their home, invest part of the equity, and use the rest to purchase smaller quarters. Some choose to move closer to family, some leave expensive city dwellings for smaller towns, and some select a new lifestyle that requires less maintenance. Condo living has become a popular choice due to the all-inclusive nature of the services available to residents. Of course, monthly maintenance fees must be considered when weighing this option.
In each case, the decision must be made with personal goals, health, and family situation in mind. An experienced team of professionals, including a financial advisor, realtor, and perhaps legal counsel, can be invaluable in working out the details of such a plan – including how to time it to make the most of this largest asset to help enjoy retirement to the fullest.