6 ways to unlock home equity at retirement

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Recently released results of Manulife Bank of Canada’s Debt Survey revealed that nearly one in five homeowners expect to access home equity to supplement their retirement income with 10%of respondents planning to downsize and use the excess equity to provide retirement income.

That got me thinking about what options are available to retirees who want to unlock the value of their home to live on when they stop working.

1. Sell high, buy low

Of course, the most obvious alternative is to sell your home in a metropolitan area where real estate prices are high and retire to a smaller, less expensive community. For example, since former uranium town Elliott Lake fell on hard times in the early 1990s, it has promoted itself as a low cost retirement haven. You won’t get tropical weather in this town half-way between Sudbury and Sault St. Marie, but you will get bargain basement home prices and lots of rugged outdoor winter sports.

But you don’t have to go that far to find more modest housing costs. My sister and her boyfriend talk about selling both of their homes in Toronto and moving to Collingwood in a few years. Because Deb is a recruiter, she can keep working full or part-time anywhere there is an internet connection.

2. Downsize

If you own a large suburban property with the traditional three or four bedrooms and multiple bathrooms, you may want to downsize and simplify. Again, the amount of equity you can unlock will depend on where you are currently living, where you want to move and how much smaller you are prepared to go.

 We would love to trade our two-story plus basement home for a bungalow along the north/south subway in Toronto, but it’s unlikely to happen. Even small bungalows in our area are selling for between $800,000 and $1M and they generally require extensive renovations to bring them up to current esthetic and infrastructure standards.

 3. Rent instead

Even if you have always owned your own home, you may be ready to let someone else worry about escalating taxes, furnace repairs, mowing the lawn and shovelling snow. Investing the proceeds of sale of your home and renting an apartment or a house can give you freedom from those responsibilities, particularly if you want to be able to just lock the door and take off on short notice for parts unknown.

The downside is that you get what you pay for. Quality rental stock is in short supply in many areas and the nicer the apartment or house, the higher the rent. Furthermore, rents will increase over time and you may have to move again when your lease is up. You also will not be able to do structural renovations or decorate a rented property in the same way as your own home.

4. Become a landlord

Can your single family home be converted into a multi-unit dwelling? If you live in a desirable area and you do a tasteful renovation, the rental income will quickly pay for itself and leave you with a stream of income to supplement your retirement savings.

The HGTV show Income Property typically focuses on young couples trying to get into their first home, but there is no reason why a similar strategy cannot work equally-well for seniors who want to age in place. An extra bonus is that if you need live-in care later in life, the apartment can be reclaimed for the use of a caregiver.

 5. Reverse mortgage

A reverse mortgage is a home loan that provides cash payments based on home equity. Homeowners normally defer payment of the loan until they die, sell, or move out of the home. CHIP is the only Canadian financial institution that currently offers reverse mortgages.

The Pros and Cons of a Reverse Mortgage are discussed in detail in an excellent guest blog by Tricia French on Retire Happy.

Reverse mortgages allow clients over 55 to access up to 50% of their home’s value. Payments from a reverse mortgage are tax-free income, so your income-tested benefits such as OAS and GIS will not be affected.

You can repay the loan at any time and the amount you owe can never exceed the value of your property. You and your beneficiaries also will not be responsible for any shortfall if interest rates increase and housing values drop.

Nevertheless, interest will quickly grow on the amount you have borrowed and start up fees can be thousands of dollars. A reverse mortgage can quickly erode the money you have available when you eventually sell and therefore the size of the estate you can eventually leave to your children.

 6. Home equity line of credit

 A home equity line of credit, or HELOC, is a revolving line of credit secured by your home at a much lower interest rate than a traditional line of credit. The operation of a HELOC is discussed on ratehub.ca.

In Canada, your HELOC cannot exceed 65% of your home’s value. However, it’s also important to remember that your outstanding mortgage loan balance + your HELOC cannot equal more than 80% of the value of your home.

 You must pay at least the interest owing every month and you can also make extra payments of principle at your discretion. We have a HELOC which came in very handy several times when family members bought and sold property and needed funds to finance a purchase before the sale of their previous homes had closed.

Whatever method you choose to unlock equity in your home to supplement your retirement, the optimum situation is to pay off your mortgage before you retire. This will give you the most flexibility to plan for life after work without the burden of paying off debt.

 

 

 

 

 

 

 

 

 

2 Comments

  1. Sheryl, there is now a 7th alternative ! Visit http://www.sellnstay.com

    Sell n Stay is not a reverse mortgage. The investor actually owns the home and the senior rents it.

    • Thanks. I’ll check it out.

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