Will you be able to afford your home in retirement?
- Wednesday, 25 November 2015
Guess Article By: Ian Webster, Financial Planner
People looking ahead to life after work often have little idea how much money they spend now, let alone 5 or 10 years into the future.
Expenses never really go away. After all, you have to live somewhere. With the rate of home ownership in Canada hovering near 70 per cent, and with household debt near a record high, most people’s financial health is closely tied to the value of their principal residence.
But while many may have considerable wealth tied up in their home, they tend to ignore the off-balance sheet liability when it comes to the costs of keeping it. Whether it’s rising hydro rates or property taxes that only trend upward, these unavoidable costs of living are destined to take significant bites out of fixed retirement budgets.
The truth is, home and home-related expenses are far and away the largest spending category for retirees, according to a new report by the Employee Benefit Research Institute (EBRI) – and the older your home, the more likely you are to incur unbudgeted upkeep expenses.
For EBRI’s purposes, home-related expenses include mortgages, property taxes, homeowner's or renter's insurance, rent, utilities, home repairs and the cost of supplies. To which, as you age, they add housekeeping, gardening and laundry services.
Remember, you have to accumulate enough capital to generate retirement income in the first place, and then pay tax on that income, and then start to shoulder these household expenses. And that’s where some people go wrong in their calculations.
If you still have a mortgage in retirement, for example, your housing costs aren't likely to drop much compared to retirees who've paid off their homes or are serious about downsizing.
In fact, with interest rates where they are right now, your carrying costs are likely to move higher. And that’s a problem since many seniors don’t really have the income to support significant debt repayment.
Of course, for some homeowners, carrying a mortgage into retirement isn’t a choice. They may have bought a home later in life, or watched their marriage dissolve into a ‘grey’ divorce.
As separating couples struggle to split pensions and assets equitably, it’s not unusual for one partner to take out a mortgage to buy out the other’s interest in the family home, for instance.
And, even if you are mortgage free, you still have to find some way to access the value of your home – particularly if it represents a significant chunk of your net worth.
The interest costs for reverse mortgages, for instance, which are generally well above market rates for a traditional mortgage, will ultimately eat into that home equity and not leave much behind for your heirs.
What’s worse, Capital Economics economist David Madani, known for his ongoing bearish position on Canada’s housing sector, believes home prices are actually overdue for a sharp correction.
Citing challenging economic conditions, high prices, tougher mortgage lending rules and an eventual boost in interest rates, Madani believes that the Canadian housing market could see a longer-term correction of as much as 25 per cent, particularly in the hotter markets.