The already weak argument that owning a home is a retirement plan looks even worse today thanks to rising interest rates.
Like renters, homeowners need personal retirement savings in the form of a pension, a tax-free savings account, or a registered retirement savings plan that can be used to cover living costs from year to year. other. Homes can play an important role in your retirement plan, but they’re not enough on their own.
Rising interest rates demand that we take a fresh look at the role of homes in retirement. Higher rates make it more difficult for homeowners to find money to save for retirement, and add to the cost of putting a home’s equity to work to generate retirement income. Keep this in mind if your justification for buying in expensive real estate includes a secure retirement.
There is a way your home can help pay for your retirement, but it won’t work for most. Just sell the family home when you get out of the workforce and move somewhere much cheaper. The profit from this sale, tax-free if it is a primary residence, could be invested in a way that produces a lifetime stream of income.
A cheaper place might mean a smaller community, but you may not want to be away from your friends and family. A smaller home is also a possibility, but the condo or townhome that’s right for you when you retire may consume most of the proceeds from the sale of your family’s home.
The most likely housing outcome in retirement is that you want to stay in your home indefinitely. The virtues of staying home versus institutional care have been highlighted like never before in the pandemic.
Staying in your home relieves you of potentially expensive monthly rent in retirement, but you still have to cover home maintenance and property taxes. Owning a home also gives you an asset to sell if you eventually need long-term care.
The well-prepared retiree has a portfolio of sources of retirement income: Canada Pension Plan retirement benefits, Old Age Insurance, personal savings and, for about 37 per cent of workers, a company pension.
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There are a couple of ways to earn additional retirement income from home. One is a home equity line of credit, which allows you to borrow up to 65 percent of a home’s value (up to 80 percent for a HELOC and mortgage combination). You must pay the interest due on your HELOC each month, but you can postpone paying the principal until you sell the property.
Another way to get equity out of your home is a reverse mortgage. You can borrow up to 55 percent of the value of your home with a reverse mortgage and pay no interest or principal until you sell it.
Rising interest rates from pandemic record lows affect both of these tools to unlock home equity. There’s no telling where rates will be when you retire and want to use a HELOC or reverse mortgage, but they’ll almost certainly be higher than recent levels.
HELOC rates are generally set by your lender at the prime rate, plus a markup of about 0.5 percent. The current 3.2 percent prime rate could easily exceed 4 percent by the end of the year, if current rate forecasts are correct.
Reverse mortgages cost a little more than traditional mortgages: HomeEquity Bank had a variable rate product at 5.74 percent earlier this week, a one-year fixed rate of 6.34 percent, and a five-year rate to 7.34 percent. Right now, you can get a traditional five-year fixed mortgage for about 4 percent.
For households with a lot of home equity and a short-term need for cash, reverse mortgages can make a lot of sense. But carrying one of these mortgages for an extended period would be expensive.
The ideal approach for homeowners is to diversify their retirement savings portfolio with TFSAs and RRSPs. In addition, with maximum contributions to work pensions if they are available.
Saving for retirement may not be feasible in the first few years after buying a home and starting a family. Don’t worry, it’s okay to put off saving for retirement for a while.
Actuary Fred Vettese has written an entire book on how homeowners can save money for retirement called The Rule of 30: A Better Way to Save for Retirement. The key here is “save for retirement.” Even if you have a house, you need to do this.
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