Should I buy a home and pay it off? Retirement 101
January 29, 2014 | Posted by: Jay Meakin
Why have real estate as part of your retirement plans?
· Sage Advice
Many people have been given this sage advice by parents, colleagues and friends; “buy a house and pay it off” !!
· Mission Accomplished!
So you are about to retire and your home is paid for, congratulations! What now? Maybe you don’t want to sell and move to Phoenix or Palm Springs or into an assisted living facility! Your home is your castle and this is where you want to hang out until it’s time to sign off for good. Tend the garden, mow the lawn, trim the hedge animals… what ever! You’ve earned the privilege of relaxing in a comfortable home that you’ve made.
· Houston, we have a problem.
The retirement fund, CPP, OAS and RRSP’s may not allow you to keep up with expenses. Since you have to pay tax on this income, all of a sudden it is not the cornucopia of wealth you thought you had. Unless you sell and move into another property there is no real gain in useable wealth; only net worth on paper.
· The money is locked in your home.
This is where the professionals come in.
Financial planners provide many tools to manage wealth outside of your real estate portfolio, including both risk management tools and investment products.
Up until now there has been a disconnect between a Financial Planner’s toolkit and the real estate many families work so hard to pay for. In reality the product has existed for many years, but it has enjoyed only nominal success, primarily because it is seen as a last resort. But I will get to that later.
The big reason that you should own your own home is because it is a tax free asset. Meaning that when you sell your personal residence in Canada, the capital gain is tax-exempt. But how do you access that asset value without selling or remortgaging?
Nathan Wood from Freedom 55 financial offers some compelling advice:
“Products exist in the Canadian marketplace that allow people to, without necessarily selling the asset, to leverage their ownership in their primary residence and create useable income in retirement. In the context of a properly structured financial plan, these products allow one access to the wealth accumulated in most people’s most significant investment: their home!”
· Leverage is bad, or is it??
If you surveyed 100 people, I’m sure 98 would tell you leveraging is a bad thing. The simple fact is any mortgage is a financial lever. You are borrowing to purchase an asset you believe will go up in value as you slowly pay it off. Using a small amount of force (monthly payment) to lift a very big mass (purchase price of a house). If you can get past the first minute, talking about leveraging, the conversation usually turns to risk. And typically as people get closer to retirement, their risk tolerance diminishes. Which is why they want to have their home paid for in the first place.
· Bingo!, ok, not literally ‘BINGO’
Back to the problem: not enough cash at the end of each month. Again, assuming you own your home and it is paid for. If I told you this: “you can access up to 50% of the value of your home, either as a lump sum or as monthly income. You would not have to qualify for this money, and never have to pay it back as long as you live in your home.” Would you believe it? It is called the Canadian Home Income Plan or ‘Chip’.
If you have any questions about “Chip” or any other mortgage products please contact Jay Meakin for more information. Fitting this mortgage tool into your overall financial plan is an option to consider. I recommend you speak with your financial planner.
Jay Meakin - Mortgage Associate, Mortgage Intelligence
Nathan Wood - Financial Advisor, Freedom 55
403-261-4690, ext 463