The average Canadian retires at 63.5 years of age, and when they do, they typically have around $1 million in retirement savings. While that might seem like a substantial nest egg, think again. A recent report shows that the average Canadian will need $1.4 million in retirement savings to retire comfortably.
This discrepancy has many homeowners looking for equity in their homes to bridge the gap. Real estate in Canada has experienced a substantial increase in value over the past 20 years. As a result, many homebuyers who purchased homes decades ago now own homes without mortgages worth hundreds of thousands — or even millions — more than their original purchase price.
This difference between the debt you owe on your home and its selling price is called equity. If your equity is in the hundreds of thousands of dollars, you might start wondering: is my house my retirement plan?
The answer is yes, you can make your home part of your retirement plan using a few different strategies. However, this practice has drawbacks and shouldn’t be used as your only saving for retirement. Here’s how to use your home as part of your retirement plan.
How to Access Your Home’s Equity for Retirement
There are several strategies to access your home’s equity to fund your retirement. To determine which option is right for you, ask yourself these essential questions:
- How much equity do I have in my home?
- Do I want to live in my home as long as possible?
- Am I open to downsizing my home?
- Would my credit score support applying for a new debt?
Reverse Mortgage
If you own your home free and clear, a reverse mortgage can help you access your home’s equity without selling. A reverse mortgage lets you borrow against the value of your home. You’ll receive the money as either a lump sum payment or fixed monthly payments. You can use this money to supplement your retirement savings and finance your lifestyle. Reverse mortgages appeal to retirees because lenders have looser requirements. You won’t need a good credit score or income, which you may not have during retirement.
Reverse mortgages aren’t free money, however. Since you are borrowing against your home, you’ll need to pay it back. This usually happens when you sell your home or upon death.
While reverse mortgages are a common option to access your home’s equity, they aren’t without drawbacks:
- You’ll be responsible for keeping your home in good repair, maintaining home insurance, and paying your property taxes.
- This product is complicated, and you’ll need to take the time to educate yourself about the complexities.
- There is the possibility that your home will lose value while you have a reverse mortgage, and you’ll end up owing more than your home is worth.
Most reverse mortgage programs have insurance to protect against this scenario, but you’ll need to read the fine print to ensure you are covered.
Home Equity Line of Credit
Another popular answer to the question is my house my retirement plan is to use a home equity line of credit (HELOC). A HELOC is a secured credit tool that uses your home as security. You can borrow against your home at a low interest rate and repay it over and over, similar to a credit card. A HELOC is a common way to access a maximum of 80% of your home’s equity, but there are some particulars about a HELOC that you should know before applying.
First, you’ll need a good credit score and sufficient income to support the debt associated with a HELOC. Second, like any debt, the more you borrow from a HELOC, the more you’ll need to pay back. You’re only required to pay the interest on a HELOC, but this can be quite substantial, depending on how much you borrow. Finally, if you want to sell your home, you’ll need to pay back the HELOC completely because it’s secured against your home.
HELOC Pros and Cons
| Pros | Cons |
| Revolving credit limit – only use what you need Pay interest only until you sell your home Receive lump sum or monthly payments | Requires credit score and income to qualify Must be paid off when you sell your home Can only access a maximum of 80% of your home’s value |
Selling and Downsizing
While the two options to use your home for retirement involve staying in your home and using the equity to finance your retirement, the third option doesn’t include debt. This option is to sell your home and either downsize into a smaller and less expensive home (for example, downsizing from a single-family home to a condo) or choose to rent.
Selling and downsizing have several financial advantages. First, instead of relying on debt to finance your retirement, you’re augmenting your existing retirement portfolio with money from the sale of your home. This strategy eliminates interest charges or the worry that your home will decrease in value while also allowing you to choose to downsize or rent.
Can I Buy a Home Instead of Planning for Retirement?
Suppose you don’t yet own a home, and to purchase one at today’s prices, you may need to reduce your contributions to your retirement portfolio. You might be wondering: Is my house my retirement plan? Can I prioritize just paying off my mortgage and not worry about saving for retirement? While it might be tempting to prioritize homeownership and rely on equity to finance your retirement, this isn’t a good strategy.
Firstly, your home is illiquid, meaning it’s difficult to access the funds without selling your home or taking on one of the debt products we mentioned earlier. Even if you do choose to sell your home, local market conditions mean it may take weeks or even months to sell.
Secondly, have you heard the phrase, “don’t put all of your eggs in one basket?” If you prioritize homeownership over retirement savings, you are essentially putting 100% of your financial future into one asset. If the housing market declines, so will your retirement nest egg.
In contrast, a well-diversified investment portfolio is usually made up of hundreds of stocks and bonds so that if one industry or company experiences a decline in value, the rest of your portfolio will offset that loss.
Thirdly, while home prices have experienced a significant increase in the past 20 years, this isn’t a guarantee of future price gains. Home prices may stagnate or even drop in the future, and if your home is 100% of your retirement plan, you may not have a large enough nest egg to fund your retirement fully. In today’s rising interest rate environment, it’s essential to understand that home values don’t always grow at predictable rates and may stagnate over time.
So, Is My House My Retirement Plan?
Home prices have risen significantly in the past twenty years. If you have significant equity in your home, you may be able to bolster your retirement portfolio with that equity, either through selling your home or using debt products.
However, your home is not a substitute for a well-balanced, diversified portfolio of stocks and bonds in registered, tax-sheltered accounts. In particular, if you are considering purchasing a home instead of saving for retirement, this strategy is hazardous. It involves pinning your funding for your golden years in an asset that can be hard to sell and isn’t diversified. On top of that, the value of your home is strongly influenced by things you can’t control, like interest rates.
