Retiring comfortably is a goal shared by many individuals. It’s a time in life when we want to enjoy the fruits of our labour and live stress-free. But achieving financial security during retirement can be challenging. That’s where the power of leverage comes into play, and knowing how to use home equity to your advantage can be a powerful ally.

Despite some experts’ reservations, leveraging your home equity can be a game-changer in helping you meet your financial goals and enjoy a comfortable retirement.

What is home equity? Home equity is the difference between the market value of your property and the amount you owe on your mortgage. It represents the portion of your home that you truly own, which can increase over time with property value growth and as mortgage payments are made.

Understanding the Power of Leverage

Let’s dive into the concept of leverage and how it can work in your favour, especially if you purchased a home at a young age and have built up considerable home equity over the years. When used wisely and safely, leverage can be an excellent financing tool, providing numerous benefits in retirement. The key lies in distinguishing between good debt and bad debt.

Did you know? Leverage may be a great retirement finance strategy when utilized carefully. The trick is identifying good debt from bad debt. Good debt is a long-term investment. However, poor debt frequently has high-interest rates and needs to provide a better return.

Differentiating Good Debt from Bad Debt

Debt can be an uncomfortable topic for many people. It’s essential to understand the difference between good debt and bad debt. Good debt is an investment that has the potential to grow in value and generate returns over time. On the other hand, bad debt is often associated with high-interest rates and does not provide any appreciable return on investment. You can tap into good debt by leveraging your home equity and making it work.

Real Estate: A Unique Commodity

Real estate stands out as a unique commodity in the investment world. Unlike other assets, such as stocks, you don’t need to pay the total purchase price to own a property. For instance, with $100,000 to invest, you can acquire a property worth $500,000. The growth and profitability you can achieve are based on the total price of the asset, not just the amount you invest. This is the power of leverage at work. Investing in real estate offers the potential to earn returns ten times your initial investment.

Did you know? Real estate investing is unique. Property ownership doesn’t need full payment, unlike stocks. You can buy a $500,000 house with $100,000. The overall asset price determines growth and profitability, not simply your investment.

Owning a Home in Retirement: A Good Plan

The question often arises: Is owning a home in retirement a good plan? The answer is a resounding yes, regardless of your location, whether it’s Toronto, Calgary, or elsewhere. Looking at the 2021 Census Data, all age groups experienced declining homeownership rates except for older cohorts aged 70-75 and 85 and older.

3 Benefits of Owning a Home in Retirement

Now, let’s explore the reasons why purchasing a home in retirement makes sense:

1. Secure a Comfortable Retirement

Retirement homes are not for everyone. By owning a home in retirement, you can explore alternative long-term care options based on your primary residence. The COVID-19 pandemic has highlighted the benefits of staying home rather than residing in shared facilities.

2. Generate Rental Income

Investing in real estate allows retirees to become landlords and earn rental income from their properties. Creating additional income streams during retirement can take time and effort, as you typically exhaust your usual cash flow sources. Rental income from real estate can significantly improve your financial situation during retirement.

3. Leverage Home Equity

I always advise my clients that yesterday is the best time to invest in real estate. Historically, Toronto’s real estate market has seen an annual appreciation rate of nearly 6%. As the market appreciates, so does the equity in your home. This presents multiple opportunities to leverage your home equity to meet retirement expenses or other financial needs.

Using Home Equity in Retirement: A Good Idea?

If your retirement doesn’t go according to the meticulously detailed plan you prepared in your thirties, and you need cash, tapping into your home equity can be an excellent solution. However, it’s crucial to understand the associated risks.

To quote Mark Slater, senior wealth advisor, and portfolio manager with CIBC Wood Gundy, home equity should ideally be used as a “temporary way to access money for a major purchase.” While using home equity in retirement can be advantageous, it’s essential to exercise caution.

6 Options for Utilizing Home Equity in Retirement

Here are some ways you can utilize your home equity in retirement:

1. Downsizing and Earning Rental Income

Consider selling your current property and downsizing to a smaller condo. This allows you to earn rental income while improving your quality of life. As a bonus, you might explore the option of building a laneway suite you could move into while renting out your primary residence. Before proceeding, familiarize yourself with the regulations governing laneway suite construction in your area, such as Toronto. Also, consider that selling property can sometimes also cost money, depending on where you live, and the time it takes to sell property can vary as well.

2. Moving in with Family

Another option is to sell your property and move in with your family. This can provide financial relief and the opportunity to spend more time with loved ones.

3. Relocating to Another City or Country

Selling your property and moving to another city or country is an adventurous choice that can improve your retirement lifestyle. Researching your desired destination thoroughly and considering factors such as cost of living, healthcare, and proximity to amenities is essential.

4. Reverse Mortgage

A reverse mortgage is a viable option for accessing home equity during retirement. It allows you to borrow against the value of your home without making monthly mortgage payments. Instead, the loan is repaid when the property is sold or upon the homeowner’s passing.

5. Debt Consolidation

Leveraging your home equity loan to consolidate other debts can be a smart financial move. By paying off high-interest loans with lower-interest home equity funds, you can simplify your financial obligations and reduce your overall interest expenses.

6. Leveraging Home Equity: Know the Limits

In Canada, most lenders allow you to leverage up to 80% of your home’s current market value minus any outstanding mortgage payments due. It’s important to understand the terms and conditions of your specific loan agreement and consult with a financial advisor to determine the best course of action.

How to Leverage Home Equity in Retirement: Exploring Your Options

Retirement is a significant milestone in life, when we should be able to enjoy the fruits of our labour and relax. However, it’s not uncommon for retirees to find themselves needing additional funds to cover unexpected expenses or fulfill lifelong dreams. If you’re a homeowner, one option worth considering is tapping into your home equity. In this article, we’ll explore three options available to retirees and shed light on the pros and cons of each.

So, let’s dive in!

Option 1: Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit, commonly known as a HELOC, is a mortgage product that allows homeowners to access their home’s equity as a line of credit. This option is a valuable tool for retirement planning. 

Here’s how it works:

Imagine you own a beautiful $1 million home in Toronto, and you have diligently paid off $500,000 of your mortgage over the years. This means you now have $500,000 in home equity. If you’re eligible for a HELOC of up to 80% of your home’s equity, which amounts to $400,000 in this case, you can utilize these funds during your retirement to meet various financial needs. Whether it’s renovating your home, covering medical expenses, or diversifying your real estate investment portfolio with a pre-construction condo or assignment sale, a HELOC provides you with the flexibility to do so.

One of the significant advantages of a HELOC is that you only pay interest on the amount you borrow. This feature offers potential cost savings and greater financial flexibility. However, it’s crucial to remember that a HELOC loan requires regular interest payments. Therefore, assessing your financial situation and ensuring your ability to repay the loan before taking the plunge is essential.

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

Did you know? According to a recent poll, 24% of Canadian homeowners intend to use their home equity for retirement via downsizing, a HELOC, reverse mortgage, or mortgage refinancing.

Option 2: Home Equity Loan

A Home Equity Loan, also called a second mortgage, is another option for retirees looking to tap into their home equity. With a home equity loan, homeowners can access a lump sum by leveraging the equity they have built up in their homes. 

Let’s take a closer look:

Suppose you own a cozy home in Toronto valued at $800,000 and have already paid off $300,000 of your existing mortgage. This leaves you with $500,000 in home equity. If you’re eligible for a Home Equity Loan of up to 75% of your home’s equity, which amounts to $375,000 in this case, you could borrow $100,000 from your Home Equity Loan. This amount can then fund that dream vacation you’ve always wanted or supplement your retirement income.

One of the significant advantages of a Home Equity Loan is the access to a substantial reserve of funds, which can act as a safety net during rainy days. Additionally, Home Equity Loans often come with lower interest rates when compared to other forms of credit. However, it’s important to note that regular monthly interest payments are required, which means an increased total debt burden. Furthermore, the variable interest rate associated with the loan may introduce some level of risk.

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, a variable interest rate of the loan rises the risk

Option 3: Reverse Mortgage

A Reverse Mortgage is a unique option available to homeowners aged 55 or older, allowing them to access a portion of their home equity during retirement. 

Let’s uncover how this option works:

To take out a reverse mortgage, you first need to apply for the loan. If approved, you could receive the loan proceeds as a lump sum, monthly payments, or a combination. The unique aspect of a reverse mortgage is that it doesn’t require you to make regular payments towards the loan. Instead, the loan is repaid when you sell your home, move out, or pass away.

Consider this scenario: You’re the proud owner of an $800,000 home in Toronto, and you’ve managed to pay off your mortgage entirely, leaving you with $800,000 in home equity. If you qualify for a reverse mortgage, you could be approved for a loan of up to 55% of your home’s appraised value, which amounts to $440,000 in this case. This money can be received as a lump sum or monthly payments, helping cover your expenses throughout retirement.

While a reverse mortgage offers the unique advantage of allowing you to access your home equity while still living in your home, it’s essential to consider the potential drawbacks. Accumulated interest over time could impact future generations, and high costs and fees are associated with taking out a reverse mortgage loan. Furthermore, a reverse mortgage may increase your overall maintenance costs as a homeowner, and it could affect certain government benefits, such as Old Age Security (OAS) or Guaranteed Income Supplement (GIS).

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)

FAQ

How can I use my home equity in Canada? 

Home equity can be used in several ways in Canada, including through a home equity line of credit (HELOC), a second mortgage, or a home equity loan. You can use these funds for home improvements, to finance other properties, or for other personal expenses.

How can I use my home equity money? 

You can use your home equity money for a variety of purposes, such as making home improvements, investing in a second property, consolidating debt, or covering other large expenses.

Is it a good idea to take equity out of your house? 

Whether it’s a good idea to take equity out of your house depends on your personal financial situation, the current market conditions, and the purpose of the funds. It’s important to consider the potential risks and consult with a financial advisor.

Can you pull equity out of your home without refinancing? 

Yes, you can pull equity out of your home without refinancing through a home equity line of credit (HELOC) or a home equity loan.

How to use your home equity to buy a second home in Toronto? 

You can use your home equity to buy a second home in Toronto by taking out a home equity line of credit (HELOC), a second mortgage, or a home equity loan. The funds can be used for the down payment or to cover the entire purchase price, depending on the amount of equity you have.

What is a Home Equity Line of Credit (HELOC)? 

A HELOC is a type of loan that allows you to borrow money up to a certain amount, using the equity in your home as collateral. It works much like a credit card, allowing you to borrow as much or as little as you need up to your credit limit.

How to Use Home Equity – Final Words

Using home equity can be a strategic financial move for homeowners in Toronto, and across Canada. It can provide funds for home improvements, investment in a second property, or other significant expenses. However, it’s crucial to understand the implications of borrowing against your home equity, including potential risks and costs.

Always consult with a financial advisor to make informed decisions about using home equity. Remember, while your home may be a valuable asset, it’s also the place you live, and preserving that should be a top priority.