Can Being a Property Owner Help you for Your Retirement?
Owning a home, a condo or even a cottage allows you to obtain certain loans, such as a home equity line of credit or a reverse mortgage.
Home equity line of credit
If you own a home, a condo or a cottage, you could apply for a
home equity line of credit before you retire. What is it, exactly? It is a loan secured by your home that allows you to have an interest rate lower than another type of loan.
Usually, the line of credit granted corresponds to a maximum of 65% of your home's value. For example, if your home is worth $400 000, you could obtain a maximum home equity line of credit of $260 000. However, you must think about it before you stop working. Negotiating a home equity line of credit could be more difficult when you no longer have employment earnings.
Financing an emergency expense
Why could a home equity line of credit be useful when I retire? If you were to have an emergency expense, you could finance it with an interest rate lower than one from a credit card, for example.
But be careful: you have to be disciplined with a line of credit because generally, you must only pay interest every month on what is taken from the line of credit. But, if you only do that, you will never pay off your debt. Also, it is easier to spend because you can pay off your debt in part only, which makes it increase all the time. You must therefore be responsible, plan a payment schedule and respect it to clear off your debt.
Rounding out your income to stay in your home
If you would like to stay in your home, but are running out of income, a home equity line of credit could be useful. You could use it to withdraw money and round out your income. But using this method is very different from the one that allows you to finance an unforeseen event at a lower interest rate.
Using a home equity line of credit to compensate for not having enough income when you retire is sort of a last resort solution. Even if you pay interest on the sums you withdraw from the line of credit, the debt will increase as long as you are staying in the house. You will have to reimburse it when you sell your property.
Reverse mortgage
A reverse mortgage is a way to withdraw money that corresponds to the value of your house while you are living in it. Concretely, you obtain a loan secured by your home up to a maximum of 55% of its value. The older you are (the minimum is age 55) and your home is valuable, the higher the loan can be. You do not have to make regular repayments on a reverse mortgage, as opposed to a home equity line of credit. Usually, you repay the mortgage completely when you sell your home. Otherwise, your heiresses and heirs will repay it after your death.
Be careful: a
reverse mortgage is less advantageous because it is often more expensive than a home equity line of credit and it comes with a lot of constraints. You will have to pay several legal and administrative fees, such as notary fees, file opening and evaluation fees of the home. Interest rates are generally higher than those of a home equity line of credit. It is important to take time to look at the big picture and get advice.
Downsizing your house
When you retire, you could also choose to move into a smaller house, which could cost you less or require less maintenance, if we are talking about a condo, for example. It is worth thinking about because as you get older, you could have less energy to maintain a big house or no longer want to spend significant amounts for maintenance and repairs. You probably know it, being a property owner also often requires making important decisions, which can be harder than before with age.