Consider These 3 Ways of Using Your Home to Fund Your Retirement Plans
Most Canadian retirees consistently report that they prefer to remain in their family home, in their current neighbourhood, and close to family and friends, for as long as possible.
Yet, many also say that financial challenges are the biggest hurdle in doing so.
Related: Stretching your Retirement Dollars
A mortgage-free home is usually one’s biggest single asset.
Here are three ways to tap into that asset and generate some income from your house.
1. Develop your basement suite
While you are still working you can top up your mortgage or take out a line of credit to construct a basement suite that you can rent out. Initially, the rent will pay back the debt, then the suite will provide supplemental retirement income.
Converting your basement into a rental unit can be a lucrative move if you have the right temperament.
First, make sure the zoning laws in your location allow secondary suites. Check the regulations and requirements and get the necessary permits.
You are expected to declare the rent as income and pay tax accordingly. You can also claim a tax deduction for the percentage of the expenses (based on square footage) that the rental suite occupies, e.g. heat, hydro, insurance, mortgage interest.
Be careful with claiming Capital Cost Allowance (CCA) for any long-term renovations such as a new furnace. While it may lead to savings in the short-term, you will have to pay capital gains when you sell your house.
My mother-in-law gave her tenant a reduced rent in exchange for help around the house – shoveling snow, mowing the lawn, and minor repairs, which worked out well for both of them.
If you don’t want a permanent renter, join the digital B&B revolution. You can list your spare, unused rooms for short-term rentals.
2. Get a roommate
When their wives passed away within a year of each other, brothers Ernest and Albert made the decision to live together. Albert sold his house and moved into Ernest’s home which was large enough to provide the privacy they each sometimes required. The arrangement recaptured the closeness the brothers had shared growing up.
“Old Ernie can be a pain in the patoot sometimes, but overall, it’s working out great,” says Albert.
You could share with another retiree who has sold their home and now wants to rent.
Most of us are familiar with the old sitcom “Golden Girls,” where four women shared a house and became fast friends. Besides the financial benefits of sharing costs, having a roommate provides companionship and help with household chores and maintenance.
3. Tap into your home equity
There are two ways you can tap into the equity in your home – Reverse Mortgage or Home Equity Line of Credit (HELOC). Both can help house-rich seniors with limited incomes find an extra source of income without being forced to sell their homes.
Reverse mortgages are offered by Home Equity Bank’s Canadian Home Income Plan (CHIP) – the sole major provider in Canada.
You can access up to 50 – 70% of your home’s value depending on your age, equity and some other variables such as location. The loan is secured by your home with no need to make any payments for as long as you or your spouse lives there.
You can take the money as a lump sum, monthly payments, or a line of credit that you can tap into as needed. Access is not restricted by your current income, health or credit score.
Although set-up fees have recently come down, they are still hefty. Interest will accumulate on the amount you borrow which can eat away at your home equity, providing less in your estate to leave to your heirs.
Related: Stretching Your Retirement Dollars
A HELOC is a revolving line of credit secured by your home for an approved limit up to 80% of your equity.
It allows you to access funds quickly and pay as little as the accrued interest on the outstanding balance each month. Any loan principal that is paid is re-advanceable.
You need proof of steady income sufficient to meet your financial obligations.
Although less expensive to set up, HELOCs aren’t without risks. The downside is having monthly payments to worry about – not an ideal situation in retirement. Rising interest rates increase those monthly payments. The death of a spouse or changes to bank credit policies can cause the bank to review the credit and reduce the limit, or the loan can even be called in.
The bottom line
Many people arrive at retirement age living in a very valuable asset, but with limited cash flow to live the way they imagined. This is often referred to as being house rich and cash poor. But you do have options.
Factors like your retirement income, the condition of your home, and your financial needs all play a role in your decision.
The good news is that, as a homeowner, your substantial asset can offer you a useful source of income in retirement, no matter how you decide to access it.