If you’re a homeowner in Canada over the age of 50, chances are you’re sitting on a pretty nice chunk of change. Provided, of course, that you actually paid off your mortgage and didn’t squander your equity on whatever it is the kids like these days. Maybe stickers.
So what should you do with it? Fear not,
little old one. We here at Financial Uproar (read: one pantsless guy and a laptop) have put together a little guide that helps you make the decision of what exactly you should do with all that stored up home equity. Let’s have a closer look at some options.
Ah, the lazy choice. I like the way you think, imaginary person.
Many baby boomers are in the position where they don’t have to do anything. They’ve fully funded their retirement accounts over the years, and are sitting on liquid investments worth somewhere in the six to eight figure range. They’ve got an entirely different retirement problem, deciding how to best spend the money. Many won’t bother, having gotten used to decades of frugal living. Naturally, their grandkids will squander it in about 14 seconds after Grandma kicks it from emphysema.
That’s a nice spot to be in, since you can grow old without needing to sell the house to raise cash. All Grandma needs is a strapping young lad to cut the grass, and she’s in business.
Another option is to take out the ol’ second mortgage.
The best time to do this is when you’re a little younger and and still have time to go before you retire. You can borrow against the house, invest the borrowed proceeds, and use the dividends to pay the interest off. Then you can buckle down and pay back the principal. Sure, it’s a bit of a risky move — especially at a market top — but risk is something you gotta take if you’re fifty and don’t have a whole bunch in the ol’ RRSPs. Are y’all tired of me saying ol’ yet?
If you’re in the market for a second mortgage in Mississauga, get clickin’. You could even use the cash to move away from Mississauga. Yes, this makes sense. No, you can’t ask me how.
Think of a reverse mortgage like being a second mortgage, except instead of paying it back, they pay you until you move to an old folks home or the home care nurse finds you in the basement, whichever comes first.
Finance types tend to hate them, but I don’t think reverse mortgages are so bad. I’m not really sure the elderly have any sort of obligation to take care of their adult kids. So if you can turn home equity into a nice stream of income, who cares what happens to the equity of the house? Chances are the place was paid off years ago anyway.
Yes, there are more effective ways to access the equity, like selling the place and either downsizing or renting. But seniors don’t want to leave their house. Moving is a pain in the ass when you can’t carry your own things. Plus, downsizing means making a lot of difficult decisions about what to keep and what to toss.
Downsizing to a condo
This will become a more popular choice as baby boomers get older. People will have these gigantic houses and no kids around, so they’ll move into a nice condo with a balcony and live happily ever after. Freeing up some home equity helps too.
The only real issue is ownership costs of a condo. Depending on the unit, you’re looking at being forced to shell out anywhere from $250-$750 per month on condo fees. Most of those fees you’d end up paying anyway, but based on the numbers it can end up being a better deal for retirees to sell and then rent a place.
Sell and rent
Here’s what I’m talking about. Say you owned a place worth $600,000, after commissions and closing costs. You sell it, and move into a condo worth half as much, with condo fees and taxes of $750 per month. You’ve freed up $300k in equity, which could spin off $12,000 per year in cash flow at 4%. Not bad.
But at $750 per month in required fees, you’re looking at $9000 in payments each year, which eats up most of that $12,000 in cash flow. It helps, but it’s not exactly an ideal situation.
Renting could be a better option. Say you can rent an apartment in a seniors only facility for $1,000 per month, which includes everything. Based on investing the whole $600,000 and getting a 4% return, you’re looking at additional cash flow of $24,000 per year, while only paying $12,000 in rent.
And before you scoff and say those numbers aren’t realistic, realize that a) subsidized seniors’ housing is everywhere in Canada and b) it’s up to each person to see what deals they can get. Hypotheticals, yo.
What should you do?
I dunno. Figure it out yourself.
I’m partially to the selling and renting option, since I’m a believer that the next decade isn’t going to be great for Canadian real estate. But this is a complex situation; it’s best to consult some people about it who are smarter than me.
Some information in this post was provided by Canada Wide Financial, which provides second mortgages in Toronto and GTA.