The greatest component of the average Canadian family’s net worth is the equity in their home. This becomes particularly significant as retirement approaches and mortgages are either fully or substantially paid off.
Many Canadians approach retirement with trepidation. They usually face a drastic drop in income. Their financial investments are often not sufficient to compensate for the wages they will lose. While government programs such as CPP, OAS and GIS ensure few retirees will live in poverty, unless these programs can be supplemented with investment income or part-time work, the dream of winter vacations in the sun will not be realized. There are however, potential solutions which take advantage of home equity.
Despite recent softening, house prices in the Victoria region are still about double those of the average in Canada. Faced with the choice between a financially-stressed retirement, or relocating to an area which will allow us to liberate perhaps hundreds of thousands of dollars of equity – thus making a huge difference in quality of life - the retiree can seriously consider relocation.
Often this financial flexibility can be achieved simply by relocating from a high-priced area of Greater Victoria, to a significantly lower-priced area. Even easier, one can choose to stay in the same area, but downsize to a lower-cost home.
Whichever of these options may be the most palatable, it should at least be considered. Life is short. We should be able to enjoy it – especially once we retire. It makes little sense to be cash-poor and house-rich in our retirement.
Although not possible in all homes, another option may be to convert a part of the home into a self-contained rental suite. The result, as already evidenced in several progressive areas like the city of Victoria and Sidney, may be a significant income boost. Properly planned for completion before retirement, even a $20,000 conversion cost may well be recovered within several years. Such a suite could easily add $10,000 a year to a retiree’s income. This might cover all property taxes, insurance, maintenance and utilities. The rental suite just may be the difference between staying in the home and a forced relocation.
One cautionary note. The benefit of all these options diminishes drastically if, throughout your working life, you have used your home mortgage as a personal ATM – to finance a lifestyle higher than you can afford, even while still in the workforce. This tendency by some is a key reason why more than 25 per cent of Canadians enter retirement still carrying a mortgage.
Although not always easy, living within our means and paying off our mortgage well before retirement, builds major equity in our home.
This disciplined approach eventually pays off, providing us with various options for extracting equity from our home and boosting our retirement income.
A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, The SMART CANADIAN WEALTH-BUILDER, is available at Tanner’s Books, and in other bookstores.