24% of Canadian homeowners expect home equity to fund at least some of their retirement: survey

• 1 in 3 Canadian homeowners have stretched their finances to purchase a home with retirement in mind.
• 24% of Canadian homeowners plan for their home equity to fund at least some of their retirement in the form of downsizing, a home equity line of credit (HELOC), reverse mortgage, or mortgage refinance.
• Homeowners who purchased in the last two years are three times more likely to expect their home equity to fund the majority of their retirement, compared to those who purchased earlier (17% versus 5%).

While one way to capitalize on the value of your home is to rent out your property, another is to tap your home equity.

A recent RATESDOTCA survey conducted by Leger revealed that almost a quarter of Canadian homeowners (24%) expect their home equity to fund at least some of their retirement. Of those who do, the majority are between the ages of 18 and 34 (39%), and recent homeowners who purchased in the past two years (43%).

There are different ways of tapping the equity you’ve built in your home to help you out in retirement, from home equity lines of credit (HELOCs) to downsizing and reaping a profit.

Regardless of which route you take, finding a lower mortgage rate at the time of purchase can play a crucial part in paying off your loan and building equity quicker, allowing more financial flexibility later in life.

1 in 3 Canadian homeowners have stretched finances to purchase a home

According to the survey results, 33% of homeowners admit to stretching their budget to buy a home in anticipation of home equity one day funding part of their retirement, our survey reveals. This means a significant number of Canadians may be taking on overwhelming mortgage payments.

This buying behaviour appears to be more common among those aged 18 to 34 (49%) and less common among older homeowners aged 35-54 (31%) and 55+ (22%). This could indicate a shift in the motives behind homeownership for up-and-coming buyers.

When we dive deeper into the results, we see a troubling trend. According to the survey results, 20% of respondents aged 18 to 34 say they spend 50-74% of their monthly income on mortgage payments alone.

According to the Canada Mortgage and Housing Corporation (CMHC), monthly housing costs shouldn’t exceed 32% of your average gross monthly income before taxes, known as your gross debt service (GDS) ratio. With such a discrepancy among this age group in what should be allocated to housing costs and what is, stretching finances for homeownership has the potential to backfire if reliance on a pay-off is too high.

“For the baby boomer generation, overwhelmingly, their homes were the biggest driver of their wealth accumulation,” says David O’Leary, certified financial planner and founder of Kind Wealth.

“Unfortunately, I don’t think younger Canadians today have that luxury. We’ve had a period of exceptional growth, and so people expect to see 20%, 30%, 40% increases over two- or three-year periods, and that’s way above the historical average for real estate.”

The possibility of your home one day being worth less than what you bought it for is a valid scenario to consider in today’s market, and yet another lesson in not overspending on your home.

If you’re a first-time homebuyer hoping to follow in the footsteps of others buying with equity in mind, it’s a good idea to use a mortgage affordability calculator to figure out a realistic budget before buying or refinancing.

24% of Canadian homeowners plan for home equity to fund at least some of their retirement

A good chunk of Canadians are looking at their homes as investment vehicles rather than a place to rest their head at night.

Nearly a quarter (24%) of Canadian homeowners admit to purchasing their home with the intent of using built-up equity in retirement. When it comes to how to calculate your home equity, you should subtract your outstanding mortgage balance from the value of your home. If you’re planning on tapping your equity during retirement, you’re planning on taking advantage of the progress you’ve made in paying off your home.

Accessing that equity can allow certain perks and profits, depending on what you do with it. Keep in mind, however, that home equity is just one tool you may be able to use later in life. There are other products that may complement your retirement plan, like a life insurance policy, which you may want to budget for.

When we asked those surveyed if they plan to use their home equity in some way to fund their retirement, we provided them with four examples: a home equity line of credit (HELOC), reverse mortgage, mortgage refinance, or downsizing.

Home equity line of credit (HELOC)

• What it is: A home equity loan is a revolving line of credit that typically offers lower variable interest rates than a personal line of credit and is available to homeowners with at least 20% equity. There are home equity line of credit calculators available that can determine how much you’re able to borrow.
• Pros: You’re only required to pay interest each month and can pay back the principal amount as you please. When looking for a home equity loan in Canada, you can compare rates online.
• Cons: The loan can’t exceed 65% of your home’s value unless it’s combined with your mortgage, and the full amount still needs to be paid back. If you miss an interest payment, your lender can freeze your loan or require you to repay the full amount in a shorter timeframe. Interest rates can also jump since they’re variable.
• Thoughts from RATESDOTCA mortgage expert, Sung Lee: “HELOCs give retirees who don't necessarily want to downsize an opportunity to tap into some of their equity when they need it.”

Reverse mortgage

• What it is: Available to homeowners 55 and older with at least 50% equity, this tax-free loan lets you borrow up to 55% of your home’s value.
• Pros: Requires no income verification. Regular payments are only required if you move, sell your home, or pass away. And after paying off other lines of credit, you can use the funds freely.
• Cons: Debt left on a reverse mortgage will be left to your estate to repay, and if you don’t pay the principal or interest, your home equity will decrease. You also have to consider higher interest rates than traditional mortgages and set-up fees (appraisal, legal, closing, admin costs).
• Thoughts from RATESDOTCA mortgage expert, Sung Lee: “A reverse mortgage can be a good idea for someone who is looking to start relying on annuity style payments without the need to repay. It can be a good cashflow tool to supplement one’s retirement income.”

Refinancing your mortgage

• What it is: A way of paying off your existing mortgage with a new, cheaper one. If you’ve built at least 20% equity in your home, you can refinance to a lower interest rate under a different mortgage structure and save money, especially if you keep the same monthly payments in place.
• Pros: More of your payment will go towards the principal amount, which could shorten your amortization period and help pay off your mortgage quicker.
• Cons: There are fees for ending your mortgage early. Use a mortgage penalty calculator to see if the penalties will outweigh the potential savings.
• Thoughts from RATESDOTCA mortgage expert, Sung Lee: “Refinancing could be recommended by some financial planners if you want to reinvest the equity into something that's going to generate a higher return vs. the mortgage interest rate. This could be tricky, though, since a retiree will have a lower risk tolerance, making it harder to get the higher returns they may need.”

Downsizing

• What it is: Selling your home if it’s appreciated in value, for a smaller, less expensive place to live.
• Pros: Can yield a significant profit without taking on additional debt.
• Cons: Even if you’re able to sell your home at a high price point, you may have to buy within the same hot housing market. This could mean buying high, even for something smaller, leaving you no further ahead.
• Thoughts from RATESDOTCA mortgage expert, Sung Lee: “Downsizing is also very commonplace for empty nesters who move to a condo or smaller property and cash out the difference."

Pandemic buyers are three times more likely to expect home equity to fund majority of retirement

Overall, it’s younger and relatively new homeowners who are considering their home equity as a retirement plan.

In fact, 17% of those who purchased in the last two years are relying on their home equity to fund most of their retirement versus only 5% of owners who bought more than two years ago.

Of the 24% who only plan on using home equity for some of their retirement, 43% bought in the past two years, while 21% bought more than 2 years ago.

Of the same percentage, 39% were aged 18 to 34, 24% were 35 to 54, and 19% were 55+.

One potential cause for a detour in the road to retirement for younger homeowners could be the reality of an evolving employment structure.

“Increasingly, younger folks are doing contract work or side hustles,” explains O’Leary. “Whereas, 10 or 15 years ago they might have been working a full-time employee position with a group RRSP. When it’s done through your employer it becomes automatic. That fact alone could deter people from going to a bank and opening one up to contribute to.”

According to O’Leary, many younger people look at the tax-free savings account (TFSA) as the newer “shinier” retirement savings vehicle, when compared with the registered retirement savings plan (RRSP).

“If people are contributing to a TFSA before an RRSP, most young folks don’t have enough money to max out both of those accounts,” says O’Leary. Therefore, many may be planning to turn to their property as an added form of financial stability once they’re out of the workforce. However, utilizing a Government of Canada retirement calculator may provide a more well-rounded view of your finances down the line.

Is expecting your home equity to fund your retirement a viable plan?

Banking on your home equity being a primary source of financial stability later in life isn’t necessarily a seamless plan. “That’s a dangerous game to get in to,” says O’Leary. “Historically, a lot of financial planners will remove their client’s home from the equation, entirely, to make sure they have enough to live off and don’t outlive their money. Housing isn’t nearly as liquid as the rest of your investments.”

Though there are many useful products that allow you to tap your home equity, not all methods are built for funding your retirement alone. Downsizing is one of the few ways to tap your equity without acquiring more debt, but in a hot housing market, it may not provide the relief you expect if you sell high but also need to buy high. So, while HELOCs, reverse mortgages, and refinancing should all be considered as you make your retirement plan, they shouldn’t be substituted for a savings account.

“[These products] all rely on the same principle of tapping into your equity and that suffers from the problem of counting on your home appreciating so much,” says O’Leary. “Just because that worked for the baby boomers doesn’t mean we can count on that type of wealth accumulation from our primary residences.”

Completely abandoning the concept of a retirement savings plan can pose a risk to your livelihood and debt accumulation in your later years.

“There might be a pretty prolonged period of [financial] painfulness before we balance out again,” O’Leary says. “I think it’s only prudent that people prepare to tighten their belts.”

Methodology

An online survey of 1,586 Canadians (1026 homeowners) was completed between April 29-May 1, 2022, using Leger’s online panel, which has approximately 400,000 members nationally and has a retention rate of 90%. No margin of error can be associated with a non-probability sample (i.e. a web panel in this case). For comparative purposes, a probability sample of 1,586 respondents would have a margin of error of ±2.5%, 19 times out of 20.