A traditional benefit of owning a home instead of renting is building up equity in the property, namely the value of the home or condo less the mortgage amount owed. However, ownership as an investment is becoming questionable in some markets. There are often questions about how much higher the real estate market can go before it begins to drop. The typical Canadian home has doubled in value since 2001. Currently, a regular stream of immigration continues to support high prices in the market, but the demand for larger homes can be expected to lessen as the supply of potential buyers ages.
It is common to consider downsizing as a plan that suits your long-term needs. If you are approaching retirement or already in retirement, the question of downsizing may be something you have considered. If you are experiencing financial stress, downsizing may help you to meet your expenses more comfortably. If you are having financial difficulties, a Toronto licensed insolvency trustee at Harris & Partners Inc. is available to help you consider your options.
Money Traps among Home Owners
As most home owners have experienced, owning a home can entail costly repairs and renovations, added responsibilities and property taxes. Owners of town homes and condos commonly face maintenance fees, possible special assessments and the potential for homeowner association fees.
If you have a high debt ratio as a home owner, you are considered house rich and cash poor. Two potential money traps are possible as a result: a home equity line of credit or a reverse mortgage. Both forms of secured debt may essentially make you pay for most or all of the price of your house a second time.
A line of credit secured to your home is sometimes considered a second mortgage, but it allows you to borrow the equity in your home at a lower interest rate than a traditional unsecured line of credit, although higher than a variable mortgage rate. You don’t have to take out the full value of the loan upfront, but rather withdraw amounts you need and pay these amounts back with interest.
To obtain a reverse mortgage, a homeowner needs just 55% equity in the home. A homeowner borrows money against their home equity and receives regular payments from the lender until the equity withdrawn plus interest charged reach a credit limit, at which time the lender either gets repayment in a lump sum, including significant fees, or takes possession of the house.
Garth Turner, financial author and former federal Minister of National Revenue, describes reverse mortgages as being “great for people who hate their kids.” The reason is that much or all of the value of the house goes to the financial lender instead of to the homeowners’ children as an inheritance.
How Downsizing Can Help
Although there are increasing rates of seniors who are getting more comfortable with debt, a popular approach among empty nesters is to sell your house and buy a smaller home or condo, perhaps a bungalow, with a plan to use the realized capital appreciation to help cover living expenses. A smaller mortgage with less property tax and a smaller utility bill can be financially beneficial. Living in an eco-friendly, low-maintenance lifestyle in a walkable neighbourhood with easy access to amenities has its appeal. If you buy a smaller home in an up-and-coming neighbourhood, where there is a potential increase in house value once the area is fully developed, your move can be financially worthwhile.
Sometimes life events such as divorce or unemployment are unexpected and force you to find a smaller home for financial reasons. Some people feel that moving into a smaller home is difficult psychologically as it symbolizes a lower standard of living and goes against conventional thinking that “bigger is better.” At the same time, it is said that living in a smaller home can help bring people closer together.
Read our guide – What happens to debt when someone dies in Canada?
Buying a Smaller Home
There are many costs to keep in mind to downsize, including real estate fees at potentially 6% of the home and land transfer tax ranging from 0.5% to 2% if you buy a new home in Ontario. There are always costs associated with moving, including the cost to replace furniture that is too large with smaller sets in order to save money eventually.
Renting Your Next Home
Many people prefer to rent, with less trouble and cost of dealing with repairs, while freeing up funds and often enjoying greater amenities than they couldn’t otherwise afford to buy.
Renting also has potential problems. If you are used to owning in the past, you may be tempted to make improvements that end up benefiting your landlord. Payments for rent can eventually drain retirement savings without building up equity. Over time the cost of rent will rise as well.
Some people will opt to sell their home and use the proceeds of a house sale to rent for a while. They may want to see how they like a certain neighbourhood or feel in a smaller place. They may hope to keep their retirement savings for a later move into a seniors’ lodge or nursing home.
Whatever type of home you ultimately decide upon be sure to plan ahead to ensure the home is accessible for everyone. You may not have difficulty getting around, but might have visitors who do. Consider a home on one level and at least one entrance on ground level. Be sure to plan for a bathroom that is wheelchair accessible or can be made that way.