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HOUSE MONEY

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A client’s residence can be a valuable

piece of the financial plan.

Susan Yellin explores how this works

FORUM NOVEMBER / DECEMBER 2016

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The idea had been percolating for more

than 10 years. But once retired couple

Emma and Theo started spending

more time in Arizona every year, they

began to seriously question why they

were maintaining their 3,200-squarefoot

home just north of Toronto.

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Their three children had grown up

and moved away, the mortgage was

paid off, major renovations had been

made, and they felt they were imposing

on relatives and neighbours to make

sure the grass was cut, the mail picked

up, and the pool maintained

when they weren’t there. Comfortable

for now in their fully equipped motorhome,

they made the decision to sell their house.

The sale of their home plus the balanced

portfolio in their retirement savings

will come in handy when they buy

a condo in Toronto in a year or two.

.;

“We will definitely spend less on a

condo than we did on the house,”

says Emma. “The difference between

what we sold the house for and what

we expect to pay for a condo

will be invested and we can t

heoretically use the proceeds to

pay for the condo fees and property taxes.”

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With no capital gains on a principal

residence, the couple realize they are

among the lucky few: Emma, a retired teacher,

has the safety of a generous defined

benefit pension plan,while Theo, a

consultant, has invested their savings wisely.

More importantly, say some financial

advisors, they used their home as only

part of their total retirement package

and were lucky enough to sell in a

hot market. When it comes to whether

Canadians should use their homes as a

source of retirement funds, the answer

usually is “maybe.” It all hinges on

where you live, your preferred lifestyle,

and your financial position.

..

Generally, the economy of a region

dictates the best time to buy and

sell a house. “There is no broad statement that

applies to everybody,” says Robert Hogue,

senior economist, economics research

with Royal Bank of Canada. “Is now a

time to buy? Is now a time to sell?

It really depends on everyone’s particular circumstances.”

..

The old real estate saw of “location,

location, location”still stands when

talking about housing prices in Canada.

Prime locations have seen a good

long-term trend of appreciation,

especially in thriving economic

regions of the country, says Hogue.

“This is a type of asset where demand relies

on the economic and demographic

landscape of the region.The economic

regions that do well also tend to

receive fairly robust demographic

fundamentals with growing populations.”

Canada runs the temperature gamut —

from hot to lukewarm to cold.

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For many Canadians, relying on

their home as a source

of retirement funds can be a risky business.

It’s one thing to sell a home in a large urban

centre with a robust market if the homeowner

is looking to downsize, says

Lynne Triffon, R.F.P., CFP,

and vice-president of

T.E. Wealth in Vancouver,

where homes average around

$1 million.

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Even then, Triffon says, clients need to

be realistic about their expectations.

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Buying a new condo could mean

new furniture and or renovations,

while selling may be easier than

buying due to the multiple-offer phenomenon.

 

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Despite that, Triffon often includes

downsizing in her retirement projections.

However, she does so with a conservative

twist on the assumptions, forecasting

increases in line with the cost of inflation

as well as lower-than-current market

values. “Ideally, this would only be

one piece of retirement income and

other investment assets and pensions

would provide for essential living

expenses, and the home equity as

a source for the more discretionary

expenditures, such as travel,” she says.

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People also tend to underestimate

what it costs to provide for

a comfortable retirement. They

don’t think about the fact that with

increased life expectancy there

is generally a good chance those

retiring today will live into their

90s — or longer. “If we knew what

day you were going to die, financial

planning would be much easier,”

says Triffon. “Since we don’t

know, as people age they start to

worry about running out of money.”

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Healthy and active retirees who

have just sold their homes for

$1 million or more may think

this sale will help them lead a

grand lifestyle, but tend to forget

about such issues as inflation and the

cost of travelling. Then there’s

the potential for requiring personal

aides or moving into a private

assisted living centre or nursing

home where costs currently

range from $4,000–$10,000

a month, she says.

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On the other side of the country,

the housing market in the

Maritimes has been relatively

stable recently — it was at just under

$300,000 in July. It’s a key

reason why a number of people have

sold their homes in southwestern

Ontario and moved to the much

more reasonable prices of Eastern

Canada, says Paul Wilson, CFP,

and owner of jpw.ca Insurance

Retirement Investments in Halifax.

 

But it’s a different matter for

those who have been living in the

Maritimes all along. While

they can’t cash in on a big

housing windfall, Wilson sees

little problem with the idea

of using a collateral or reverse

mortgage, depending on the

client and the complexity of

the financial product.

 

“Whatever you do, give the

person the most flexibility

possible and keep it relatively

simple,” says Wilson.

“A complicated solution might

be better numbers-wise if you

let an accountant figure it out

… but the older you get the

simpler it should be

.

“Right now interest rates are

low, but I can honestly say I haven’t

met too many 84-year-olds who

are overly excited about complicated,

debt-ridden income streams.”

 

 

If the choice of homeowners is

to stay put, then options might

include a collateral mortgage

to let retirees pull out the tax-free

funds from their homes to use

for emergencies, or a reverse

mortgage to provide an income

stream, says Wilson. If they decide to

downsize, they can use the proceeds

to purchase a prescribed annuity

to fund new accommodations,

with the balance invested for

emergencies.

 

 

What exactly is recommended

depends on individual circumstances

and needs to be considered as

part of the overall financial

plan. And since there is often

little time for recovery, worst-case

scenarios need to be considered

and understood, he says.

 

 

Oddly enough, in oil-depressed

Calgary, where 100,000 people

are out of work, housing prices

have remained relatively stable at

about $470,000. Despite the oil

and gas doldrums, most Calgarians

are not thinking about downsizing

their homes to finance their

retirement. “Not at this point yet,”

says Kenneth Doll, CFP, CLU,

TEP, a professional wealth

strategist in Calgary.

 

 

“Generally I’m not in favour

of using your home to fund your

retirement. It can be risky and

should be used more as a supplement

or last resort to retirement

rather than as a foundation for your

retirement.”

 

 

Even with reverse mortgages,

says Doll, people may outlive the

value of their assets. It’s up

to him, he says, to help clients

save the money they need for

retirement so they don’t have

to rely on their home to fund

their retirement.

 

 

But many Canadian baby boomers

are deep in debt and may

be looking to their home

for a retirement windfall.

Downsizing can reduce debt and

supplement their retirement, he says.

 

 

Selling a home at retirement

can make sense if it’s planned

or if the person has outgrown

their house, agrees Jason Abbott,

president of Toronto-based

WEALTHdesigns.ca Inc. “[But]

if the only reason to do it is

because you are speculating

in real estate values, then

I think that’s a mistake.”

 

 

Abbott gives the example of

empty nest clients who want

to sell their Toronto home and

move to northern Ontario. They

have more than $2 million in

home equity they want to remove

and put into their overall portfolio

that will generate their retirement

income. In this sense, like the

one with Emma and Theo, the s

cenario makes sense. “But if

someone is going to continue

to live in the house and start

tapping into equity, that’s the

situation whereyou start

getting into precarious positions,”

he explains. “In that case, all it

would take is a cash shortfall

or a market downturn and

the next thing you know,

the person is upside down

to the point where they’re

displaced from their home.

That’s the situation that you want to avoid.”

 

Abbott has found that most people are

saving what they can

and don’t have the benefit of a

multi-million-dollar home as part

of their retirement plan.  Nine

times out of 10 he doesn’t build

home equity into their financial plan.

Moving from a city to a rural area may

give people more bang

for their buck, but that can also mean

moving away from family and

friends, and a different quality of life.

“Those are trade-offs that you

are going to have to determine as well,”

says Christopher Dewdney,

CFP, CHS, CPCA, and principal at

Dewdney & Co. in Toronto. “But

strictly from a financial standpoint,

there is value in selling your

home. Take that additional equity

after you have purchased a smaller

home or a condo and use it to supplement

your retirement.”

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Those with an emotional attachment

to their home may want

to look into a number of options,

including  the previously mentioned

reverse and collateral mortgages,

as well as home equity

lines of credit (HELOCs), he says.

Like others, Dewdney is careful

to point out that homeowners

understand the fine print of

the different products and how

they can affect their financial futures.

 . 

“If you have additional space in your

basement or elsewhere

in the house, you can still stay in your

home and rent,” he notes.

“That will bring in income and

supplement retirement … and

can provide some camaraderie with s

omeone your same age.”

􀀀

SUSAN YELLIN is a freelance writer based in Toronto.

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READING THE FINE PRINT OF FINANCING

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Financing strategies come with their

own pros and cons, says Andrea

Meynell, a mortgage broker with

Northwood Mortgage Ltd. in Toronto.

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With a traditional mortgage, you

register how much you want to

borrow: say, $250,000. At the end of

the term you can move to a different

lender, although you may

need to pay some fees.

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With a collateral charge, a mortgage

is registered for the amount you are

borrowing: $250,000. However, if your

property is worth, say, $500,000, the

company offering the collateral-charge

mortgage can register it for the amount

you borrow — or for up to 125 per cent

of the value of the property ($625,000).

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The amount above the original loan of

$250,000 is available to you in the

future if you want to borrow more and

qualify for it, without having to break

the mortgage, pay fees and a lawyer.

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Meynell notes, however, that if you

want to get a second mortgage you

can’t go to another lender because

the first company already has the

whole value of the property registered.

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A reverse mortgage is a loan for

homeowners aged 55 and over, which

is secured by the equity of the home

and allows homeowners to get some

cash without having to sell their home,

says Meynell.

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It’s tax-free and no payments are

made, but the interest accumulates

and the equity you have in the home

decreases over time. The loan is paid

back when the homeowner dies and

the estate sells the house — or surviving

children can pay off the debt

and keep the house.

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Meynell says the loan is usually

50 to 55 per cent of the value of the

home and is subject to higher interest

rates than most other types of mortgages.

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Living longer eats away at the

equity in the home, but ownership

remains with the borrower.

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Home equity lines of credit

(HELOCs) are another flexible option

with the line of credit secured by the

property. Interest charges don’t start

until you actually start to use the

money, and it’s an open loan so you

can make minimum payments at

regular intervals or pay it off all at once.

.

Meynell doesn’t recommend

HELOCs to those who can’t manage

money, but does suggest it as an option

to those who want flexibility and access

to a buffer in case of emergencies.

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–S.Y.

 

 

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