CANADIANS, AGE 55-PLUS, are racking up debt faster than we previously thought. A new survey by Equifax for HomEquity Bank finds retirees and those close to retirement are increasingly willing to tap the equity in their home to fund their lifestyle. The survey shows that in the last two years the number of Canadians 55-plus carrying a mortgage has jumped by 10 percent.
The main culprit is low interest rates and an incredible surge in home prices. With home prices in the last decade almost doubling in some parts of Canada, it’s easy to see how it can be tempting to dip into the gains. But you need to consider this before you start using your home like an ATM in retirement.
Rates are at record lows
It’s hard to remember a time when we didn’t have low rates, but anyone older than 55 should think back to the ’80s and ’90s when interest rates were surging and home prices were falling. Although the Bank of Canada has stressed any rise in rates will be slow and steady, the fact is rates really can’t go anywhere but up from here.
If you own your home outright and start borrowing against it in retirement you have to treat it like any other mortgage loan. Could you afford to make the payments if rates were 2-3 percentage points higher? This is a good way to test your affordability. As well, when rates rise, home values are likely to fall, resulting in even less equity in your home.
Not all debt is created equal
There are a few ways you can borrow from the equity in your property. The first is to take out a traditional mortgage and make payments to the bank on a schedule that works for you. The next is to get a Home Equity Line of Credit (HELOC). That loan is usually a little more expensive. Currently many banks are offering a rate of prime plus 0.5 percent.
With a HELOC, you can withdraw what you want when you want to, and you only pay the interest on the money you use.
The next option is a reverse mortgage. Unlike the first two, you don’t have to make payments until you move, sell or die. Canadians 55 and older can access 50 percent of the equity in their home. However, reverse mortgage loans are more expensive. Currently, HomEquity Bank is offering a five-year fixed rate of 5.49 percent. They sell most of the reverse mortgages.
Exhaust all options first
I’m not a fan of going into debt during retirement. At retirement, we should work with the situation we have to get the most value. The number one way to raise money is to downsize; it’s the smartest, easiest way to bring down costs. It also gives you a realistic picture of what your total assets are.
If you don’t want to move, consider creating a rental suite in your home to generate income. If you have money in your RRSP, tap that investment first. The problem with using equity in your home to fund retirement is there’s a chance you could find yourself in deep (unmanageable) debt down the road. It also means leaving a smaller financial legacy to your loved ones, if that is a priority.
As finance editor for HOMES Publishing Group, Rubina Ahmed-Haq also shares her expertise in our sister publication Condo Life. In addition, she is a regular contributor on CBC Radio, blogger at RateSupermarket.ca and has her own website alwayssavemoney.ca