PETER DOLEZAL: Extracting equity from real estate

Being debt-free is a liberating experience. Don’t miss out on it.

In 1999, about 27 per cent of Canadian seniors over age 65 carried some form of debt. Today, that figure has risen to over 42 per cent.

It is therefore not surprising to learn, from a recent Angus Reid survey commissioned by CIBC, that the average Canadian homeowner does not expect to pay off his mortgage before age 58. In B.C., with our much higher real estate prices, those surveyed expect on average, to reach age 66 before liquidating their mortgage.

Some 65 per cent of Canadian families own a home. By the time we retire, our home is  often larger, and perhaps in a higher–cost area than we really require. Typically, our home is our single-greatest asset — the largest component of our net worth.

A realistic option for those carrying debt into retirement is to downsize price-wise, to a level sufficient to liquidate all debt. Beneficially, any capital gain on a personal residence is not subject to income tax when the home is sold.

Another option is to sell the existing home and consider renting instead of purchasing a replacement. If the choice is to rent, the extracted equity, after all debts are repaid, can be carefully invested in low-cost income-generating products, to not only cover rental costs, but also, to enhance retirement lifestyle.

We’ve all heard the expression “house rich; cash poor” — unfortunately an all-too-accurate description of far too many retirees. One great advantage of living in our beautiful but very costly real estate area is that when we do sell, we stand to gain far more tax-free benefit than homeowners in other areas of Canada. This offers further opportunities for local retirees, not necessarily to downsize their home, but  to relocate and purchase a similar residence in other, lower-cost areas, either locally, or further afield in British Columbia, or even other provinces.

Other viable options can be considered by retirees to reduce debt and enhance lifestyle. Selling a single family home and purchasing a replacement with a separate rental suite can add up to $1,000 to monthly income, even if no equity is extracted in the transition.

In British Columbia, homeowners over age 55 have the unique opportunity to defer property taxes for as long as desired, until the property is sold. The provincial government finances the deferral at an incredibly-low simple-interest rate of 2 per cent below prime. For a retiree needing a few hundred extra dollars monthly, this is an option worth considering.

Rarely, if ever, should a retiree consider entering into a “Reverse Mortgage” arrangement to retire debt or upgrade lifestyle.

This high-cost option offers to advance cash, with no repayment obligation, until the home is eventually sold. Once sold however, the compounded, high-interest obligation must be repaid in full — severely eroding the home’s equity. It has been best stated that if you “hate your heirs and don’t want to leave them a legacy in your estate, sign up for a reverse mortgage.”

Retirees in Canada are very fortunate. Once we reach age 65, our personal tax deductions increase substantially; many pension incomes can be notionally-split for tax purposes; most of us become eligible for CPP and OAS payments; and we pay less for many goods and services.

If the substantial benefits that accrue once we retire are insufficient to provide the lifestyle we would like to enjoy, it makes great sense to resolve the shortfall by extracting some of the substantial equity we have accumulated in our personal residence.

Being debt-free, with sufficient income to enjoy our retirement, is an extremely liberating experience. Don’t miss out on it.

 

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Mea Culpa! A reader wrote to me, pointing out two necessary corrections to my recent article on RRSP and RRIF conversions.

Firstly, not only can an RRSP holder “borrow” up to $25,000 toward a down payment on a first home, as the article pointed out, but also, up to $20,000 can be “borrowed” toward the cost of further education.

Secondly, while rarely a useful feature, a RRIF account may be converted back to an RRSP, as long as it is done before age 72. My article had stated that once an RRSP is converted to a RRIF, the conversion cannot be undone.

That was an error. My apologies!

 

A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his most recent, The Smart Canadian Wealth-Builder.