“You should definitely consider your home equity as part of your retirement assets since, for many, it’s the largest asset they own,” says Spencer Look, associate director of retirement studies at the Morningstar Center of Retirement and Policy Studies.
Indeed, in Canada in 2019, the principal residence represented $473,900, on average, or 49%, out of total assets of $965,000, according to StatCan. Those pre-COVID numbers will definitely need to be refreshed since median house prices in many cities have increased from 38% to 69% across Canada, while total assets have also increased for many households, especially in the higher-net-worth brackets. Ultimately, the portion of total assets held in the home has undoubtedly gone up, but it’s hard at this point to say by how much.
If we work with a 50% share of home equity in a household’s total equity, it means that by the time you reach retirement, you’re standing on a lot of idle equity. How can you put at least part of that to work? The answer hinges on a very personal choice: “Do you want to stay in your house, or not?” asks Jean-François Labbé, financial planner with Investia Services. He continues, “What I see often, is that people keep their home up to their retirement or sell it and go on to rent,” often in residences that are older.
Let’s look at three possible paths: generating revenue from your home, selling it, and leveraging it.
Generating Revenue
In today’s expensive rental market, reorganizing your residence to accommodate tenants can be an attractive way of putting to work the dormant capital of your home. “It can be a great way to get extra revenue, but of course, having people in your house, you have to agree with that,” Look says.
Three obvious paths present themselves: 1) You move out of your house, rent an apartment, and find short-term tenants through Airbnb or other online platforms; or long-term tenants through Kijiji or Facebook Marketplace. 2) Since the kids are gone, you reorganize the space to set up a bachelor or small apartment that you rent out long term. 3) If you have enough land, you build a “granny house” that you inhabit and then rent out your original home. If you take on a new mortgage to finance the granny abode, you can cover the payments with revenue from the home rent and still end up with some extra cash on hand. Of course, in every case, city regulations need allow one option or another, and you need to find the emotional fortitude to see others living in your residence or sharing some space with you. You must also be ready to live with the extra management burden.
Selling Your Home
The most obvious option is to downsize. Let’s say your house is worth about the national median value of $800,000 that prevailed at the end of 2023. You sell it and move to another dwelling that costs $500,000; you have just freed $300,000 in value with which you can maximize a Tax-Free Savings Account to generate revenue.
One possibility is to buy an annuity to cover a large part of recurrent fixed expenses. At current rates, and since the capital would not come from a registered account, a 65-year-old male would fetch an annual revenue of approximately $19,900; a 75-year-old female would get about $23,700.
The path of downsizing can work on two conditions. The first, Look highlights, is to be disciplined. “You need to be focused and keep your costs in line,” he says. Some purchase a $500,000 home and proceed to spend $250,000 on renovations, negating the basic purpose which was to free up capital for retirement revenue.
The second condition is to move to another area. “Most of the time, when I see people downsize, they don’t put money in their pocket unless they leave the area where they lived. But that’s not always obvious: the strongest glue cementing you in place is grandkids,” emphasizes John Lawson, senior wealth advisor at Assante Wealth Management, Sana Family Office. He continues, “Just this week, we delivered a financial plan to clients who were in that exact position: They downsized and ended up spending more money than they got from the sale of their house.”
Of course, one can choose to rent rather than buy, using the freed-up capital to cover all or part of the rent expense. “This can be a much more viable option for folks,” Look says. “In certain places, you can have a community feel, something which you’re not so sensitive to while you’re still working.”
How To Leverage Your Home for Extra Cash
The third path to free up some passive equity from your home is to contract a loan against its value. Here, three options stand out: taking on a home equity loan, a home equity line of credit, or HELOC, or a reverse mortgage.
The home equity loan and the HELOC are not meant to generate revenue, Look warns, but they allow you to put to work some of the equity locked into your home. Home equity loans “are best used for bigger expenses that you can’t meet head-on, like a big repair,” he highlights. Beware, this is not a line of credit, but a lump sum that the bank hands over to you and that you have to pay back following a monthly timetable. Look points out, “You want to be able to make that payment, and that’s why it’s a last-resort option, just like any other loan.”
A HELOC is a more flexible option than the previous one. You can borrow up to 65% of the net equity value of your home (gross value minus any residual mortgage). You are not held to a fixed repayment schedule, and you can obtain lower interest charges than on personal loans because your house stands as collateral, but you need to at least cover the monthly interest charges on your loan.
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