5 ways to tap your home for cash in retirement

Caroline CakebreadReal estate prices have risen through the proverbial roof across Canada over the last decade. Consider that the average price of a home in Canada was $154,624 in 1997 and in March 2015 that figure had rocketed up to $431,812. It means a lot of long-time homeowners – particularly seniors who outright own their homes – are sitting on a goldmine. In fact, the equity built up in a home can dwarf retirement savings in other vehicles. Which means that your home should be part of your retirement plan. You may also want to consider options around using this asset should the unexpected happens (the Ontario Securities Commission’s latest research has shown that 6 out 10 Canadians aged 50 and older have encountered unexpected events that impacted their finances and retirement plans). Whether you’re planning on selling or staying, here are a few ways you can tap into your home equity to help the cash keep flowing in retirement.

Sell and rent — The simplest way to get money out of your home is to sell it and put the proceeds into an investment that will boost your yearly income. You’ll first need to factor in expenses (such as real estate agent fees, lawyer fees, moving costs, or paying off any remaining mortgage you might have) as well as determine the amount of risk you’re willing to take in investing, as this often has an impact on the return you could get. And remember, unless an investment is held in a TFSA (which itself has a contribution limit) the investment earnings will be taxed. If you were already mortgage-free and made $400,000 from the sale of your home after expenses, you could use that money to generate another $24,000 a year before taxes in income based on a 6% return a year – enough to likely cover the rent on an apartment (and you’re not on the hook for repairs).

Sell and downsize – If renting isn’t for you, then consider selling and buying a cheaper place. That could mean moving to a town or region where homes are less expensive or simply buying a smaller and less costly home in the same area. Keep in mind that your needs might change as you age. For example, shifting to a home that’s without any steep stairs to climb may be beneficial down the road, so think strategically. If you are considering downsizing to a condo, remember to factor in the monthly maintenance fees: they can rise from year to year so you need to understand the impact they might have on your fixed cash flow.

Become a landlord – If you have the space, think about converting part of your home into an apartment. Doing this will let you generate additional income every month. First, however, you need to make sure you’re cut out to be a landlord – that means dealing with issues at all hours and being able to find the right tenant. Do some research before going this route; learn about everything from landlord-tenant acts in your municipality, to building code requirements, to the impact becoming a landlord would have in filing your income tax return.

Rent it out temporarily – Thinking of spending a year traveling? Consider renting out your home when you’re not there to help finance your trip. Or think about setting up a house swap and live rent-free someplace where you’ve always wanted to travel (a bonus if that place has a lower cost of living!).

Get a reverse mortgage – These are designed to free up the equity in your home and to pay it out in a lump sum or in the form of monthly income. The money is tax free and any interest you pay is deductible. But there are some drawbacks with this approach – you have to pay interest on the loan and the penalties can be steep if you decide to cancel. Read more about the pros and cons of reverse mortgages.

While there’s often a lot of emotion that comes with owning (and particularly, selling) a home, it’s important to include any real estate you own in your financial planning and equation. Remember, these suggestions are simply thought starters; any decisions around selling or renting a home or making investments should be made with all the factors and risks considered. Consulting with real estate or financial professionals is always recommended.

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One Response to 5 ways to tap your home for cash in retirement

  1. Dave Dineen says:

    I’d add a sixth possibility to your list, Caroline. It’s borrowing against your home equity and investing what you’ve borrowed.
    Like the other five options, it has risks (your investments could go down, the income stream they generate may not be sufficient, etc.), but the solution is not as life-changing as the five options you mention.
    With my bank’s rate cut on its home equity line of credit, I can borrow at 3.25%. Buying any of the bank common stocks pays a higher dividend than that (and they’ve paid dividends continuously for 100+ years) while BCE pays a dividend of close to 5%.
    It’s not for everyone, but it’s an often-overlooked option.