by Fabien Major
What you’ll learn
In June 2016, Retraite Québec (a new agency that was created by a merger between CARRA and RRQ) conducted a survey on financial independence and found that 60% of Québecers plan on selling their assets, such as a company, cottage or house, to finance their retirement.
Just talk to some of your colleagues or loved ones: you will notice that those who don’t have a pension plan or substantial savings are hoping to use their property as a source of revenue. While it is recommended to take out RRSPs or TFSA, effectively budgeting for these can be difficult for some households.
Paying back your mortgage is, in a way, a means to force yourself to save money. As the years go by, your home’s equity—and your net value—increases. But how can you actually use this money, which is tied up in your home, to generate regular revenues?
If you plan ahead, you can definitely protect your assets. You can purchase and live in an income property. For example, if you have children, you could keep the most spacious apartment and access to the backyard. Then, you can rent out the remaining apartments in order to reduce your monthly mortgage payments. Years later, when your children have left the next, you can move into one of the smaller apartments and generate higher revenues. You can even refinance a part of the property and invest the money you receive.
With a secondary residence, you can opt for similar solutions. The easiest is to sell your property; however, don’t forget to consider your alternatives. You can refinance your cottage, invest the money and rent it out! Oftentimes parents realize that their children are not quite as interested in the cottage. Why not rent it out each season? Well-maintained properties in great locations can rent for $1000 a week in different areas. This is great revenue to round off the end of the month.
If you don’t have a lot of savings or accumulated benefits with the Régie des rentes, you unfortunately have less options. You may have to consider selling your home. You should invest in the equity you’ve received and set aside reasonable amounts to pay a rent and live within your means. The major challenge with this option is often psychological. When people have spent most of their lives as homeowners, they find it very difficult to become renters again. However, if you set aside this feeling, however, think of all the freedom you can get from the sale of your home and recurring revenues. There is nothing to be ashamed of! Just this past summer, I spoke with the former president of major financial institution in Québec. He became a renter for the first time in his life…and he loves it! When he sold his huge home, he decided to rent—and not buy—a home in a location he truly wanted to live in. Because he fell in love with the neighborhood and all of its amenities, he decided to sign a long-term lease.
To take full advantage of the value you have accumulated in your property, you may want to look into a reverse mortgage. This way, you can keep your house AND obtain a significant amount of money. A reverse mortgage has become popular thanks to the CHIP reverse mortgage from the HomeEquity bank. You can get up to 50% of the net value of your property without paying tax or repaying the loan for as long as you own it. When you pass away, the bank will take back the amount of the loan and the payments that should have been made; note, however, that the amount to be reimbursed will never exceed the market value of your home when your surviving relatives sell it. If a couple decides to take out a reverse mortgage—and one of the two passes away—the surviving spouse can continue to live in the house and take advantage of the same benefits.
A reverse mortgage is calculated based on several factors, such as gender, age, the neighborhood and value of your home. Why the gender and age? Because, as is the case with insurance companies, a bank will give out a loan based on life expectancy. Women live longer than men, which means the loans are generally lower. On the other hand, the older you are, the higher the loan. The amounts that are lent out are not based on your revenues or credit score, contrary to refinancing your home. Don’t forget that if you are considering a reverse mortgage, you must set aside money for a professional evaluation, legal fees, and other administrative costs. Setting up a reverse mortgage can cost nearly $2000.
Finally, if you want to establish a similar structure with more flexibility, talk to an advisor or financial planner, who will work with your mortgage broker, to determine the best scenario. You could simply refinance your home (with a mortgage or home equity line of credit) and invest the amount in a conservative and diversified portfolio. If your loan costs, let’s say 2.5%, and your investment generates 5.5%, you can save the difference. Think about it: for once you’ll earn money at the bank! That monthly surplus will allow you to enjoy retirement by going on trips, having leisure activities, giving gifts to loved ones, etc.
With a strategy such as this one, you have to remember that you are not looking at the short term and you mustn’t consider speculative investments. Make sure you opt for investment funds or exchange-traded funds, with the safest securities, such as bonds. In my case, I only consider solutions that have at least a decade of history. This way, we can see how the portfolio withstood during the 2008-2009 crisis. Because these investments are considered as upcoming revenues, both the Canada Revenue Agency and provincial entities enable you to deduct the interest. Remember that your installments will be partially taxed. If you choose tax advantaged investments or Series T funds, you will receive a return of capital that is not immediately taxable.
Each of the aforementioned scenarios have their own pros and cons, and will generate different tax impacts. Don’t interpret these options as advice that definitely applies to your current situation. Make sure you analyze each option very carefully. Talk to a tax specialist or professional accountant to get more details on the right solution for you and your family.