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.
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“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.
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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.”
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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.”
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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.
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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.
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“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.
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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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