More than ever, owning a home is not a retirement plan

The already weak case that owning a home is a retirement plan looks even worse today thanks to rising interest rates.

Just like renters, landlords need personal retirement savings in a pension, tax-free savings account, or registered retirement savings plan that can be used to cover living expenses. year to year. Homes can play an important role in your retirement plan, but they are not enough on their own.

Rising interest rates force us to review the role of retirement homes. Higher rates make it harder for homeowners to find money to put aside for retirement, and they add to the cost of building equity in a home to generate retirement income. Keep this in mind if your reason for buying in an expensive real estate market includes a secure retirement.

Your home can help pay for your retirement, but it won’t work for the majority. Just sell the family home leaving the job market and move to a much cheaper place. The profit from this sale, tax-free if it is a primary residence, could be invested to produce a stream of income for life.

A cheaper location might mean a smaller community, but you might not want to be away from friends and family. A smaller home is also a possibility, but you may find that the condo or townhouse that suits you in retirement uses most of the proceeds from the sale of your family home.

The most likely housing outcome in retirement is that you want to stay in your home indefinitely. The virtues of home care over institutional care have been highlighted as never before in the pandemic.

Staying in your home frees you from paying potentially expensive monthly rent in retirement, but you still have home maintenance and property taxes to cover. Owning a home also gives you an asset that you can sell if you ultimately need long-term care.

The well-prepared retiree has a portfolio of sources of retirement income – Canada Pension Plan retirement benefits, Old Age Security, personal savings and, for about 37% of workers, a company pension plan.

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There are several ways to draw additional retirement income from your home. One is a home equity line of credit, which allows you to borrow up to 65% of the value of a home (up to 80% for a combination of HELOC and mortgage). You must pay the interest due on your HELOC each month, but you can defer paying the principal until you sell the property.

Another way to take equity out of your home is through a reverse mortgage. You can borrow up to 55% of the value of your home with a reverse mortgage and pay no interest or principal until you sell.

Rising interest rates from historic pandemic lows are affecting both of these tools for unlocking home equity. There’s no way to tell where the rates will be when you retire and want to use a HELOC or reverse mortgage, but they’re almost certain to be higher than recent levels.

HELOC rates are usually set at prime by your lender, plus a markup of around 0.5%. The current prime rate of 3.2% could easily exceed 4% by the end of the year, if the current rate forecast is correct.

Reverse mortgages cost a little more than traditional mortgages – HomeEquity Bank offered a variable rate product at 5.74% earlier this week, a one-year fixed rate at 6.34% and a five-year rate years at 7.34%. A traditional five-year fixed mortgage can be had for around 4% right now.

For households with high net worth and a need for short-term cash, reverse mortgages can be a great choice. But carrying one of these mortgages for an extended period would be expensive.

The ideal approach for homeowners is to diversify their retirement savings portfolio with TFSAs and RRSPs. Also, with maximum contributions to workplace pension plans if available.

Saving for retirement may not be feasible in the first few years after buying a home and starting a family. No worries – there’s nothing wrong with postponing retirement savings for a while.

Actuary Fred Vettese wrote an entire book on how homeowners can save money for retirement, titled The Rule of 30: A Better Way to Save for Retirement. The key here is “saving for retirement”. Even if you own a house, you have to.

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