Weekend Reading: Tapping Into Home Equity Edition
Many retirees want to know how much they can spend in retirement without running out of money. The caveat is that most also want to remain in their home as long as possible. With the pandemic shining a light on poor conditions and service at long-term care facilities, it’s likely we’ll see even more seniors wanting to ‘age in place’.
What that means for some retired homeowners is coming up with a way to tap into their home equity. The most common thought is to downsize – sell the family home and move into a condo or smaller house while pocketing the difference in price. Another option is to sell the home and rent in retirement.
Those who want to remain in their home for comfort, sentiment, or other reasons may choose to utilize a home equity line of credit. One challenge with this approach is getting a large enough loan in place while you still qualify (i.e. before you retire). Another challenge is that tapping into the loan triggers monthly interest payments.
Finally, there’s one option that was once considered taboo but is now becoming increasingly popular: a reverse mortgage. Canadian homeowners aged 55+ can set up a reverse mortgage through one of two lenders, Equitable Bank and HomeEquity Bank.
The reverse mortgage allows you to access up to 55% of the value of your home. The cash can be paid over a longer period of time (literally like a reverse mortgage), or in a lump sum up front.
The money is tax-free. You maintain ownership and control of your home, and only pay back the loan when you move or sell. Any appreciation in value over time still belongs to you. You’re simply required to keep the property maintained, pay your property taxes, and keep the house insured.
In areas of the country like Vancouver and Toronto, many seniors will find that their home is by far their largest asset. If the idea is to age in place and leave the home in your estate, you may be sacrificing your own retirement lifestyle along the way.
Imagine you live to age 95. How old will your beneficiaries be and how useful will an inheritance of several million dollars be to them at that time?
Then there’s the reality that you may not be able to age in place for your entire lifetime. Poor health outcomes might dictate a move to a retirement home at some point.
A paid off home is indeed a cornerstone to a solid retirement plan, but retirees should also consider tapping into their home equity by some measure to enhance their lifestyle and/or plan for extra healthcare costs in their later years.
One question for my homeowner readers – would you consider a reverse mortgage? Let me know in the comments.
This Week’s Recap:
Earlier this week I wrote about two types of overconfident investors.
Last week I was excited to share a conversation with Alexandra Macqueen and David Field, the authors of The Boomers Retire.
Alexandra was gracious enough to offer a free copy of the book to give away to a lucky reader who commented on the post. The winner of the book is “Kat” who commented on August 16th at 12:18pm. Congrats, Kat!
Promo of the Week:
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The robo automatically monitors and rebalances your investments as you add new money and when markets move up and down.
Retirees in particular can benefit from the cost savings and automation that robo advisors provide. Think about it. Cost savings matter the most when your portfolio is at its largest. And, while there’s nothing complicated about the accumulation phase, the withdrawal phase in retirement is another matter altogether. When to convert your RRSP to a RRIF? How much to withdraw from each account every year? When to schedule those withdrawals (monthly, quarterly, annually)?
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Weekend Reading:
Our friends at Credit Card Genius look at the positive and negative changes made recently to Canada’s best credit card.
You might recognize Tomas Pueyo from his excellent COVID-19 coverage but he also worked for years in the financial advice industry and laid out a few things you need to know about how to invest.
Here’s Morningstar’s Christine Benz and Susan Dziubinski on why you should trial run your retirement.
Steadyhand’s Tom Bradley explains how investors can narrow the gap between their risk capacity and risk appetite.
Jason Heath answers a reader question on how much should you withdraw from your RRIF.
Peter Lazaroff discusses investing regret, including where regret comes from, why we experience it with our portfolio, and what to do about it.
Ramit Sethi talks about why we are so emotional about money in this Harvard Business Review interview:
“Our feelings are almost always unrelated to the financial decisions we make and indicative of something much deeper.”
Can you change your mind about money? Here’s why the biggest improvement you could make to your financial well being might be to reframe the way you think about money.
Jonathan Chevreau is rethinking the speculative component of his core and explore investing approach. I think more stock pickers should do this kind of honest self-reflection.
Here’s a fascinating conversation with one of my favourite writers, Morgan Housel from the Collaborative Fund:
Here’s Morgan Housel again looking back at three times history hung by a thread due to chance encounters.
Nine questions that A Wealth of Common Sense blogger Ben Carlson is pondering about the greatest bull market in his lifetime.
Investment advisor Markus Muhs with a scathing critique of market linked GICs – not now, not ever. Agree 100%.
A great resource here by Mark Walhout on investing inside a corporation.
Finally, here’s a nice piece by the Humble Dollar’s Don Southworth on the dreaded “b” word. He writes, “for too many people, a budget connotes pennypinching, financial claustrophobia and sacrifice.” But he’s convinced that budgets can change lives because a budget changed his.
Have a great weekend, everyone!
I trial run my retirement every time I get laid off. I have a lot of practice.
Is a good thing to tap into home equity loan while interest is still low.
Stock market return will cover the cost of borrowing plus more at today’s market and the past 10 year.
I certainly have considered it. Need to look more into the risks.
I’ve thought about it, but not really sure it suits my circumstance. I have mortgage + LOC debt of about $300k and the current value of my home is around $800k. I’d love to retire debt-free but don’t know how I’d do it without making the big move and selling up and retiring the debt.
Do you think reverse mortgage is an option I should consider? If I’d only get 55%, I wouldn’t be that much further ahead after I retire the debt. R
For those of us who reached retirement age without ever buying a home — and are now unlikely to do so — I would appreciate an article on what “aging in place” might look like for renters.
I have wondered about this myself. I’ve been a renter all my life and it’s likely to stay that way into retirement. I wonder if there are enough of this demographic in Canada to glean meaningful conclusions and best practices.
Well, one-third of Canadians are renters. And while the percentage of older people who rent may be a little lower (because some of them were able to buy a house when it was cheaper), nonetheless I know many people 50 and up who don’t own their home and never will.
So yes, I think there are indeed enough of this demographic to warrant a response from Boomer & Echo.
To put it another way, if retirement blogs are going to talk only about homeowners (as though they are the only species of retiree that exists), it would be nice to have that noted up front so that we renters don’t waste our time reading them!
Hi Claire, sorry you found the article to be a waste of time.
If you’ve read the blog for a while you’d know that I am very pro-renting and have written several articles on the benefits of renting, both in your working years and in retirement.
https://boomerandecho.com/renting-in-retirement/
https://boomerandecho.com/is-renting-throwing-away-money/
https://boomerandecho.com/downsizing-retirees-should-you-own-or-rent/
I’m sure you can appreciate that not every article is going to appeal to 100% of the audience. Articles aimed at retirees might not appeal to 30 and 40 somethings. Renters don’t want to read about home ownership (and vice-versa). Singles don’t want every article to feature couples. Entrepreneurs face different challenges than salaried employees. The list goes on.
I try to keep things as general as possible to apply to the majority of people but that’s not always possible. I’m also clouded by my own experience as a married father of two living in a small city in Alberta, who doesn’t face the pressure of trying to buy a home or raise kids in big cities like Toronto and Vancouver.
Claire (and Brenda), please know that I have several clients who are life-long renters and plan to continue renting in retirement. It presents different challenges but not insurmountable ones.
I’ll see if there’s another angle to tackle the topic of renting in retirement for a follow-up post. If you have any suggestions, I’d love to hear them.
Many thanks!
Thanks for the thoughtful response Robb. I would be interested to hear more about the challenges your existing life-long renter clients face from a financial planning perspective. As a DIY/CoastFI individual, the only major impact it’s had on my planning is that I need to account for a higher decumulation amount in retirement. Renting actually made the planning easier because it has been a very predictable cost over the years so I just took the historical data and projected it out into the future with an inflation adjustment. I currently live in a VHCOL city so this is an upper bound for future rental costs. It’s more likely that I will move to somewhere cheaper in retirement but I prefer to over rather than under estimate the expense side.
When I have taken a mortgage, I have always used a product that has a linked line of credit. So as I pay down the mortgage, the amount available on the line of credit increases. So when the time comes, I will have a line of credit available. I have also had the bank increase the limit on the line of credit as the value of the house goes up. This is something I have done about every 7 or 8 years. I have just started retirement and will be using my RRSP first. I am delaying taking CPP as long as is practical. When the time comes that I will need more money I will look at my LOC and a reverse mortgage to compare interest rates and features. Ideally, I do not want to do either any earlier than necessary due to the power of compounding of interest. (Note the interest has to be paid monthly on the LOC – but I still have to get it somewhere)
I heard of reverse mortgages but I never actually knew the details on how it works. That’s a really interesting and innovative way to get some financing.. Hmm..
Hi, Yvonne Ziomecki here from HomeEquity Bank, we are providers of CHIP, which has been around for 35 years. Robb…great article outlining the basics of reverse mortgages, for those who want more information about the product you can call us at 1.833.357.2447 to ask for a copy of our book – Home Run The Reverse Mortgage Advantage that Steve Ranson our CEO and I wrote. It’s about the real estate market, options people have, talking to family about money and it does explain the product in detail. It also has a lot of expert advice and real customer stories.