With the increase in home prices Canadians have experienced over the last decades, home equity has become an increasingly important source of capital and income for many Canadians in retirement.
Since home equity is available on a tax-free basis (unlike pensions or RRSP) having access to your home equity can be useful to reduce your tax bill throughout retirement. You will pay less tax in retirement by having stable income each year than to fluctuate between high income years and lower income years.
Having access to home equity allows homeowners the ability to manage financial emergencies and take advantage of investment opportunities – while keeping their taxable income stable.
As an example of what not to do, I’ve seen situations where clients (often on advice of their bank) have liquidated RRSP’s and other registered plans to pay for major renovations. These clients were left with enormous tax bills as withdrawals from RRSP’s are taxable income. Paying tax rates close to 50% on the RRSP withdrawals greatly increased the cost of the renovations.
Had these clients refinanced or used home equity instead to pay for the renovations they could have avoided the tax hit entirely.
What are your mortgage options in retirement?
Well first, it’s important to understand the biggest secret in real estate is that your mortgage is a loan against your income, not a loan against the value of your house. Without employment income, many people cannot get a traditional mortgage.
Often security access to home equity in retirement needs to happen before you retire.
Typically, a conventional mortgage will be the option with the lowest interest rate assuming you have good income and a good credit score. I also have access to some exclusive programs where clients can get approved based on their net worth instead of income (for those who excellent credit and strong net worth but have retired before securing access to their home equity).
To avoid taking all the money up front with a traditional mortgage, many retirees choose a more flexible Home Equity Line of Credit which allows clients to dip into the available credit at any time and for any reason. HELOC rates are typically slightly higher than mortgage rates, but unlike with a mortgage, there are no penalties for paying back a HELOC and you can access the funds again in the future.
In retirement, often the biggest challenge with traditional mortgages and HELOC’s is that you need good income and credit to qualify. In addition, both mortgages and HELOC’s require regular monthly payments.
A traditional mortgage or home equity line of credit is the best option for clients, if it is available.
Too often, in retirement some clients with low income or poor credit are left with “B” or private mortgage options, at much higher rates than traditional mortgages or HELOC’s. For these clients, a reverse mortgage can be an option worth considering.
Selling your home or downsizing can be costly both emotionally and financially, especially considering you lose out on all future appreciation of the value of the home.
For clients aged 55 and older, reverse mortgages can be a useful tool to access the equity in your home without risk of ownership of your home. Since no payment required, reverse mortgages also provide flexibility to retain earning in a corporation or registered accounts to avoid or defer taxes.
With a reverse mortgage your home equity can add regular tax-free income to your other retirement income sources (a mortgage that pays you monthly instead of you paying it).
In addition, if there was a massive housing correction, you are guaranteed to never owe more than what your house in worth. Due to conservative lending practices with reverse mortgages, it has typically been the case that home value growth can offset the loss of equity, even as interest and withdrawals being added to the mortgage balance.
If you have questions about your personal situation and are looking to save money on a mortgage or use your mortgage to reduce your taxes, now or in retirement, I can help 😉