The family home is the most valuable asset for most families. With home prices skyrocketing in cities across Canada, it can be tempting to tap into the equity in your home. While some people have gold-plated government pension plans, a lot of people don’t. If your major source of income in retirement are government benefits likeCPP, GIS or OAS, and it’s not enough, tapping into the equity in your home is worth considering, especially if it means leaving the workforce and enjoying retirement sooner. Here are three ways to unlock your home equity in retirement.
If you find yourself with an empty nest – your children have moved away from home, leaving you with a big, empty house – downsizing is worth considering. Downsizing from a house to a condo is a popular option for seniors. It’s ideal for those looking to access the equity in their house and no longer deal with the responsibilities and expenses of a house (i.e. snow shoveling, yardwork, repair and maintenance, etc.).
Downsizing makes the most sense when you’re able to pocket a decent amount of money (at least $100,000). When downsizing, don’t forget about closing costs, the transactional costs of real estate. Closing costs typically amount to between 1.5 percent and 4 percent of your home’s value. Examples of closing costs include land transfer taxes, commission, legal fees and disbursements, and utility and property tax adjustments. Do the math ahead of time to make sure downsizing is a wise financial decision.
In Vancouver, Canada’s most expensive housing market, laneway houses are an option worth considering for seniors looking to downsize. Laneway houses offer the same features of the family home, just on a smaller scale. Something to be aware of is you can’t purchase a laneway house outright – you’ll need to rent it from a homeowner.
For seniors who prefer to stay put in the family home, but still want to access the equity in their homes, a reverse mortgage may make sense. A reverse mortgage is a loan for singles or couples age 55 or older. The loan is secured by your home equity. This option works best for anyone who’s built up substantial equity in their homes. The major advantage to a reverse mortgage is that you can stay put in your home and live there until you pass away. When your house is eventually sold, any money owed to the lender is repaid at that time. The major downside is that you’re using the equity you worked so hard to build up over the years. If you’re hoping to leave money to your adult children or charity, there may be little to nothing left.
If you’re not ready to leave the family home, sales-and-leasebacks is worth looking at. Although not yet widely available, a handful of these deals have been struck in Toronto, where the average price of a detached home goes for over a million. As the name suggests, under sales-and-leasebacks, your home is sold and leased back. Similar to a reverse mortgage, you’re able to access the equity in your home without moving. Since you’ve sold your home, this helps protect you should a housing crash occur. If you’re considering this option, make sure your lease is long-term and you’re able to end the lease early if your health deteriorates and you need to move into a long-term care facility.
Taping into equity in the family home is a major decision. It’s important to carefully weigh your options before making a move.
written by: Written by Sean Cooper
Sean Cooper is a Pension Analyst with a global pension and benefits consulting firm. He is a financial journalist with articles featured in major publications, including the Toronto Star, the Globe and Mail and MoneySense. His areas of expertise include pensions, retirement and health benefits. He has made several media appearances, including Bell Media, Newstalk 1010 and CTV. Follow Sean on Twitter @SeanCooperWrite and check out his personal finance blog at www.seancooperwriter.com.