As our population continues to age in Canada, there will be a number of significant issues and trends that will impact the way business and government respond to the needs of Canada’s senior citizens. One of these issues will be the need for proper housing solutions in many Canadian communities due to this phenomenon. Conventional ways of addressing those needs has typically been through downsizing or renovation to an existing home or property. However, there are other notable reasons why one might be considering selling their family home.
For example, for some, getting equity out of their homes is a big issue. This could be the result of a greater degree of financial equity being invested in the family home relative to retirement savings, lack of financial risk planning, lack of estate planning or a number of other reasons. For others, the idea may be precipitated by a major life event like the death of a spouse, health-related issues or for others it is more about lifestyle.
Whatever the reason may be, more and more, I seem to be having discussions with people who are considering the reasons why downsizing out of their family home is a financial choice that they would like to explore.
While options around home ownership are plenty, I strongly suggest that decisions around downsizing, or outright selling the family home and renting or moving into a senior’s residence should be approached with great caution.
The house is usually the last retirement asset I typically like to see people access for lifestyle reasons. For some it can be very risky to do it too soon in retirement. Once you get towards the end of your retirement years, you might not be in a position to live there anymore. Perhaps you’ll need to then fund long-term care needs.
A recent BMO Retirement Institute report titled “Home sweet home or retirement nest egg?” says the home represents the biggest financial asset for 47% of Canadians, representing 51% of their total net worth.
The Baby Boomer generation has definitely benefited from the rise in home values over the last few decades and particularly in recent years. Traditionally speaking, we’ve noted that people from past generations were very reluctant to sell the family home, preferring at very least to pass this asset onto their heirs. However, if your home is your nest egg, the question for many is what is the best way to use it to help fund your retirement?
A reverse mortgage is certainly one way you can continue to live in your home because it gives you a percentage of the equity you have built up as cash that you can access for investment or income purposes. When considering this as part of your estate plan, don’t forget that a reverse mortgage will deplete the equity in your home because the mortgage will need to be paid from the net proceeds of the estate.
Another alternative that is particularly appealing in today’s low interest rate environment is a homeowner’s line of credit. The downside to this plan is you will have to make monthly interest payments, which can eat into your cash flow. On the flip side, the benefit is that you can continue to live in your home and have a pool of cash available to withdraw from when needed.
Finally, there are reasons to consider outright downsizing or selling the family home. If your house and property are too large for your needs or too difficult to maintain, it may be a good time to consider downsizing to a smaller home or a rental to simplify your lifestyle and free up some capital. You could also consider moving to a smaller house and renting your home to generate income to cover your living costs.
Remember however, that your home may be your last source of capital. I would suggest avoid using it as a source of capital as long as you possibly can.
Make sure to take the time to fully consider the unique challenges you may face, as well as your overall personal objectives and desires around a place you’ll call home. Give yourself plenty of time to consider all of your options. Speak to people in positions of trust such as close family members, your realtor and your financial planner. This will ensure you consider multiple perspectives and options towards making a wise decision that will meet your needs not only today but into the future.
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Authored by Isaac Musial
The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including without limitation, financial, legal, accounting or tax advice.