Your house, a retirement fund?

I spoke to you recently about this dilemma that sometimes arises when you find yourself with a sum of money to grow: is it better to invest it for your retirement or to put it on your mortgage?.

Your house, a retirement fund?

I spoke to you recently about this dilemma that sometimes arises when you find yourself with a sum of money to grow: is it better to invest it for your retirement or to put it on your mortgage?

The rest of this questioning could be posed as follows: can his property be used to finance his old age?

Normally, you should arrive at the end of your career with a paid house and a well-stocked woolen stocking, so the two options set out above are not necessarily mutually exclusive.

But there you go, there are always homeowners to pay off their mortgage on the run, then be satisfied with this effort, convinced that their real estate assets will be sufficient to meet their retirement needs.

I have bad news for them.

Sell ​​and reduce

Nothing is impossible, notice.

The most promising way is then to sell your residence, invest the capital to make it last as long as possible, and live on rent.

To improve the chances of success, it is best to leave a hot real estate market and move to a more affordable area. The reverse path makes the plan hazardous.

The hardest part of this operation is to leave your house to go to an apartment. Investing the proceeds of the sale is also not easy when you have ignored this possibility all your life. It's not easy to change religion at 65.

So what are the other options?

Reverse mortgage and line of credit

If you want to live in your house, then you have to extract the dormant capital.

There are two ways to do this: the reverse mortgage and the home equity line of credit. I've touched on this before, but let's come back to it in a new light.

The reverse mortgage consists of requesting a loan based on the value of your residence. Two institutions offer this product: HomeEquity Bank and Equitable Bank. The size of the loan, between 15% and 55% of the value of the property, will depend on the age of the client; the younger he is, the lower the amount to which he will have access. The loan and accrued interest will generally be repaid upon the resale of the home or upon death.

The mortgage line of credit allows you to draw up to 65% of the mortgage-free value of the building, with the only obligation to pay interest each month.

It will be seen that the amounts that an owner can draw from his property represent only a fraction of the value of the latter. It’s not huge to finance a retirement.

And in both cases, it is not free. With the reverse mortgage, the (fixed) interest rates approach 7%, excluding other fees. The home equity line of credit costs less, around 3.7%, and fluctuates according to the Bank of Canada's key rate.

Let's close the loop now. I have nothing against the idea of ​​accelerating the repayment of his mortgage to save interest. If the retirement plan is based solely on the value of its property, on the other hand, one must expect to still pay interest to extract the capital.

It's probably better than nothing, but the strategy isn't great.

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