Why home ownership is not the key to a comfortable retirement

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They had looked for two years, but Justin Valente and his partner still hadn’t found an affordable home in Vancouver that would fit the family they soon plan to start.

So, like many other young people frustrated by Metro Vancouver’s hot housing market, the pair widened their scope to include Vancouver Island. They eventually found a roomy, olive-green house in Ucluelet, B.C., a woody, seaside town on the island’s west coast, after Mr. Valente’s partner, Natalie, found a job there.

On May 18, they got married. Ten days later, they moved into their new home. They wanted a place they could call their own. But they also, crucially, saw home ownership as the primary path to a comfortable retirement.

“In Canada, it’s definitely been ingrained in us that home ownership is the way there,” said Mr. Valente, a 31-year-old in the tech industry who’s able to work remotely. “You just buy a place, and you make money off of it.”

But for the time being, as he puts, they’re “house poor,” and they’re not alone. A recent survey conducted by Leger and commissioned by RATESDOTCA found that one third of Canadian homeowners had stretched their finances in order to enter the market with the expectation that home equity will help fund their retirement. Among this group, nearly half were between 18 and 34.

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However, the notion of relying on home equity to fund your retirement isn’t new, says Julia Chung, a British Columbia-based certified financial planner with Spring Financial Planning. It’s a strongly held belief by young people in particular, she says, one that tends to fade as people grow older.

Two years of artificially low interest rates combined with a booming housing market only served to bolster the idea that home ownership could be the ticket to a smooth retirement. But despite the continually rising prices of recent decades, the housing market isn’t a sure bet.

The way we think about debt and how we can leverage home equity has shifted in recent years, Ms. Chung says. She attributes part of that change to mortgage lenders, who have successfully promoted products that were once considered a last resort for borrowers, like a reverse mortgage or a home equity line of credit (HELOC).

Relying on home equity to fund your retirement can be dangerous, especially if you’re unable to save little else. Before entering the market, Ms. Chung says it’s important her clients understand the ramifications now and in the future.

Those who are decades from retirement age might not think through how tapping one’s home equity often involves downsizing, which can prove trickier and more expensive – land transfer costs, taxes, realtor fees and so on – than people realize. The housing market may also not be as rosy as it once was. Today, many people struggle to find a smaller place that’s meaningfully cheaper than their current home, Ms. Chung says.

And by the time they’re considering selling, some realize they don’t actually want to move, an epiphany that dawned on many during the pandemic. A survey from September, 2021, found that 96 per cent of Ontario seniors over the age of 55 planned to stay in their home as long as possible.

For those staying put, they may need to rely on a reverse mortgage or a home equity line of credit. Homeowners who are 55 and older, and who possess at least 50 per cent of their home, can apply for the former, which grants access to up to 55 per cent of equity without paying principal or interest until you sell. HELOCs offer a revolving line of credit available to those who own at least 20 per cent of their home; they require interest payments each month, but the principal debt can be paid back as one pleases.

Still, they’re products that Shannon Lee Simmons, a certified financial planner in Toronto, generally suggests her clients avoid. “You turn off the income tap, and now you’re ratcheting the debt up. It’s a scary feeling,” she said. “I do think that there’s an emotional toll.”

However, she’s more comfortable with her clients taking out equity-backed loans if the money is put toward a project that earns income. Many of her clients have used HELOCs to build rental suites in their homes. Some even decide to move into the new space and rent out the rest of the house.

Today, more and more younger people coming to Ms. Simmons for advice aren’t even interested in eking their way into the housing market. Many don’t believe it’s possible. Part of her job is to show people that there are other pathways to retirement than just owning a home, she said.

Free from the various bills and unexpected costs that come along with home ownership, some renters can begin tucking away disposable income into registered retirement savings plans and tax-free savings accounts much earlier than many homeowners. It’s a life that also affords more freedom and flexibility.

Home ownership, especially after years of soaring prices, is a tradeoff, notes Ms. Chung. The young newlyweds on Vancouver Island already understand that. They won’t be able to go on vacation any time soon.

“We’re just going to have to hang out and chill in Ucluelet,” Mr. Valente said wryly. “Which is not the end of the world.”

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