If this is your situation, you may not realize that you might actually be living in your nest egg. If you expect to be mortgage-free by retirement, this opens up several options for your retirement plan. If at all possible, you should explore these options, with the help of a good financial advisor, well before you stop working.
Here are three options to consider:
1. Plan on selling your home and downsizing at retirement.
Selling your home and moving into a smaller home or condo should serve to minimize your living expenses. In addition, you can use the surplus cash from the sale of your home to invest in a nice diversified portfolio of investments that ensures safety and income, as well as some growth. Make sure you talk to a good financial planner and/or investment advisor to get the best mix of investments for your long term needs.
2. Leverage the value of your home by setting up a home equity line of credit.
If your home is, or soon will be, mortgage free, and if you still have a source of income to qualify, setting up a "HELOC" will enable you to access the funds tied up in your home. Although there are some initial setup costs, there is no ongoing cost for having an unused HELOC available to you. And once you have it set up, you can use it when needed, either by writing cheques, doing a transfer to your bank account, or sometimes even using an ATM. If you do carry a balance, the interest rate charged is much less than on an unsecured line of credit, and you only need to pay the interest monthly. So, if you're eventually on a limited income, the payments should not be burdensome. And if you’re able to periodically make extra payments, there is no penalty to pay off part or all of the outstanding balance whenever you choose. Talk to an experienced mortgage advisor to find out if you qualify and for what amount.
3. Arrange a reverse mortgage.
If you don't qualify for a HELOC, and you feel strongly about staying in your home, this is another option to investigate. The way a reverse mortgage works is that you determine a maximum amount that you will borrow - no more than 50% of the value of your home - based on your age. You can then receive the funds in one bulk payment, several payments, or installments, based on your requirements. No monthly payments are required; rather, your interest on the reverse mortgage accumulates over time. The mortgage is paid off when your home is sold or when you and your partner (if applicable) permanently move out of your home. While there are costs associated with the setup of the reverse mortgage, it is quick to arrange and the money received is not taxable (and therefore, does not impact OAS and GIS). As long as you continue paying your property taxes and property insurance, and keep up with any maintenance, you have the security of knowing that you can keep your home as long as you wish. If this is an option you wish to contemplate further, you'll need to get advice not only from a mortgage advisor, but also a good financial planner and legal advisor.
Whether you decide to downsize, set up a home equity line of credit, or arrange a reverse mortgage, make sure you get advice from the experts in considering your options. I can't emphasize enough that the earlier you explore which option is best for your unique situation, the less stress you will experience when it is time to implement your plan.
