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Leverage is power. Period. I know that there are a lot of experts out there – financial advisors in particular – who are not big fans of using leverage to meet your financial goals. Yes, leveraging your property is tricky business but if you do it right – its dividends are insurmountable.
Leverage is a great financing tool – especially in retirement – for those who purchased a home young and over the years have built their home equity. The key is to use it wisely – in a safe & profitable manner. That’s where the concepts of good debt & bad debt seep in.
A lot of people are uncomfortable with debt. They don’t understand the difference between good and bad debt. Hey, I get it! As I said earlier, I had my own eureka moment. Since then, I’ve spent my career — well, and my life — teaching others the power of leverage.
Real estate is a unique commodity that you can own without having to pay the full purchase price. When you have $100,000 to invest, you can purchase a property worth $500,000. The growth and the profit you will receive are based on the full price of the asset – not how much you invest in it. Investing in real estate vs stocks gives you the opportunity to earn 10x your investment and all of this is thanks to one principle and one principle only – leverage.
Long story short: using leverage, you can use your home equity to buy another home or invest in any other asset class. But when it comes to using your home equity in retirement – your financial situation often dictates how you choose to use it.
Yes, owning a home in retirement should be part of your retirement plan irrespective of where you live – be it Toronto or Calgary. Looking at the 2021 Census Data – all age groups saw a major decline in their homeownership rate except the older cohorts aged between 70-75 and 85 or older.
There are a couple of reasons why a retiree may spend all their retirement funds on purchasing a home:
Secure a comfortable retirement: Old-age homes aren’t for everybody. Those who can call themselves homeowners in retirement can look for alternate long-term care options based on their primary residence. The pandemic just magnified the benefits of staying at home versus a shared facility.
Generate rental income in retirement: A retiree who has invested in real estate and is still a homeowner can list their property to earn rental income. Generating income in retirement is not easy. On retiring, you exhaust your usual cash flow streams which is why rental income can really help you deal with your financial situation in retirement.
Opportunity to leverage home equity: I always tell my clients – there’s no better day to invest in real estate than yesterday. Historically Toronto’s real estate market has been appreciating by nearly 6% every year. As the market appreciates – so does the equity of your home thereby giving you multiple opportunities to leverage it to meet your retirement or any other expenses.
If things don’t go according to that detailed retirement planning document that you carefully prepared in your 30s’ and you find yourself wanting for cash – then yes, using your home equity to help you out in retirement is a great idea!
Using home equity in retirement is a good idea but it also poses some risks. To quote Mark Slater, senior wealth advisor, and portfolio manager with CIBC Wood Gundy, home equity should ideally only be used as a “temporary way to access money for a major purchase,”.
With that being said, you can use your home equity in retirement to:
– Sell your property and downsize to a condo to earn rental income and improve your quality of life. My two cents: if you’re keen on downsizing, consider building a laneway suite that you could move into while renting out your primary residence but first go over the rules that govern the building of laneway suites in Toronto.
– Sell your property and move in with your family
– Sell your property and move to another city or country
– Take a reverse mortgage to help with your retirement expenses
– Consolidate your debt by leveraging your home equity loan to pay off other loans
Most lenders in Canada allow you to leverage your home’s equity up to 80% of the current market value of your home, minus any outstanding mortgage payment due.
If you’re leveraging your home equity for the first time in retirement – you may need some help. I strongly recommend that if it’s your first time and you have the funds – consult a financial advisor or a local real estate agent before making the final call.
Before you make that call, have a clear understanding of how you can use home equity to raise funds in retirement. Below, I share three main options along with a gist of their pros and cons:
Home Equity Line of Credit: In Canada, a HELOC is a mortgage product that allows homeowners to access their home’s equity as a line of credit, which can be a useful tool for retirement planning.
Example: Suppose you own a $1 million home in Toronto and have paid off $500,000 of your mortgage – that leaves you with $500,000 in home equity. If you are approved for a HELOC of up to 80% of your home’s equity, which would be $400,000 in this case, you can access these funds during retirement for various financial needs, such as home renovations or medical expenses. But that’s not all. You can also use these funds to invest in a pre-construction condo or pre-construction assignment sale and diversify your real estate investment portfolio.
With a HELOC, you only pay interest on the amount you borrow, providing you with flexibility and potential cost savings. It’s crucial to understand that a HELOC loan requires regular interest payments, and it’s important to assess your financial situation and ability to repay the loan before taking one up.
Pros of using a HELOC in retirement: Flexibility, lower interest costs & potential tax benefits
Cons of using a HELOC in retirement: Variable interest rates, continuous monthly payment, risk of overleveraging.
Home Equity Loan: A home equity loan, also known as a second mortgage, is a financial tool that allows homeowners to tap into the equity built up in their home and access a lump sum of money. These loans generally have fixed interest rates and set repayment terms, typically ranging from 5 to 30 years. Most home equity loans require you to make regular monthly payments towards the loan, which include both the principal amount and interest.
Example: Imagine you own a home in Toronto valued at $800,000 and have paid off $300,000 of your existing mortgage, leaving you with $500,000 in home equity. If you are approved for a Home Equity Loan of up to 75% of your home’s equity, which would be $375,000 in this case, you could borrow $100,000 from your Home Equity Loan to fund a dream vacation or supplement your retirement income.
Pros of using a Home Equity Loan in retirement: Access to a large reserve of funds that can help you on a rainy day, offers lower interest rates when compared to other forms of credit
Cons of using a Home Equity Loan in retirement: Regular monthly interest payments, increased total debt, variable interest rate of the loan increases risk.
Reverse Mortgage: A reverse mortgage allows homeowners who are at least 55 years old to access a portion of their home equity in retirement. It is a loan secured using your home’s equity, and the loan amount is based on factors such as your age, home value, and location.
To take out a reverse mortgage on your property – you would have to first apply for the loan. If approved, you could receive the loan proceeds as a lump sum, monthly payments, or a combination of both. The loan does not require you to make regular payments. Instead, the loan is repaid when you sell your home, move out of your home, or pass away.
Example: Let’s say you own a home in Toronto valued at $800,000 and have paid off your mortgage, leaving you with $800,000 in home equity. You could apply for a reverse mortgage and be approved for a loan of up to 55% of your home’s appraised value, which would be $440,000 in this case. You could then choose to receive the loan proceeds as a lump sum or monthly payments to help cover your expenses in retirement.
Pros of taking out a Reverse Mortgage in retirement: Allows you to access the equity of your home while living in it, no monthly payments unlike the other options, flexible option – you choose how to receive your money
Cons of taking out a Reverse Mortgage in retirement: Accumulated interest that could potentially impact future generations, high costs & fees associated with taking out a reverse mortgage loan, homeowner liability can increase your overall maintenance costs, negative impact on certain government benefits like Old Age Security (OAS) or Guaranteed Income Supplement (GIS).
As a top luxury real estate broker in Toronto who has been in the industry for over 15+ years, I have had clients who have asked me how I would use my home equity in retirement. I want my life in retirement to be very simple – hence, I recommend a simple strategy.
1. Downsize and move into a smaller asset – whether that’s a pre-construction condo, a resale condo, or a laneway suite.
2. Rent out my existing home (large asset) – making sure that all costs associated with its management are completely covered for by rental payments. In the perfect world, your property should be cash flow positive but in Toronto’s super-competitive real estate market that can be challenging.
3. Live off my retirement income that’s supplemented by the rental income I’m receiving by renting out my biggest asset.
Whether you’re in step 1 or step 2 – looking to rent out your property or looking for a property to move into – book a call and I’d be happy to help you with the entire process!
By now, I hope you have a better understanding of how you can use leverage and home equity in retirement to your benefit. If you’re still not sure or want to talk more about how you can best utilize your dough, book a call to discuss, I’m always here to help.
Disclaimer: It’s important to note this is a financing tool to get ahead faster. This is not a suggestion to take out all of the available debt to you and spend it on a whim. You must budget correctly otherwise you can get yourself into trouble.
