The twin financial pillars in many clients’ lives comprise two basics: their homes and their jobs. One of the reasons retirement can be so difficult for so many clients is that it often brings an end to these two things, sometimes at the same time. But the current transformation of retirement, driven largely by longer, healthier lives, means that many of your clients will be looking for ways to maintain the status quo for both pillars. (See story, below.)
For your clients to stay in their homes, however, may require as much new thinking as continuing to be active in the workforce. Apart from the costs of maintaining the house, reduced mobility will eventually turn once benign zones such as stairs and bathrooms into hazards; modifications, such as elevators and walk-in bathtubs, can be costly.
“When people are 50, they say they want to live in their house until they die,” says Blair Corkum, financial advisor and chartered accountant with Corkum & Arsenault Chartered Accountants in Charlottetown. “But once they get to 65 to 75, they start finding it difficult to keep up with the maintenance.”
While a walk-in tub may not break the bank — the cost generally runs $3,000-$4,000 — other modifications may cost much more. Sales of home elevators, for instance, are rising strongly, driven partly by baby boomers intent on staying put. These can run $20,000-$30,000, a sum that may be daunting for someone who is reliant on a fixed income.
Nevertheless, there are some seniors who remain adamant about staying in the home they’ve lived in for many years. They love the house — and, in many cases, the garden — and they don’t want to leave their neighbours and neighbourhood.
The problem is how to find enough cash flow to allow your clients to stay put without undue sacrifice. One possibility is to rent out part of the house, such as the basement, but dealing with tenants can bring a lot of headaches. Another route is to withdraw excess cash from whole-life insurance policies. Another, more common option, is to find ways to access the equity held in the home — a growing pile of cash for many Canadians.
This last route, however, requires careful planning. One of the first steps is to assess how much money will be required and if it will be used for one-time expenses, such as modifications to account for reduced mobility or used for ongoing living expenses.
Although most financial advi-sors prefer that retirees be debt-free, retired clients don’t usually have a problem with borrowing for a one-time major expense, such as retrofitting the house for health or mobility reasons. Advisors tend to be much more concerned when it’s a question of taking on debt for a permanent increase in cash flow.
There are three ways of getting equity out of home while continuing to live in it — a mortgage, a home-equity line of credit or a reverse mortgage.
Using a mortgage, or adding to an existing one to finance retrofitting, is a viable option — particularly if your client’s cash flow will allow the mortgage debt to be paid off within a reasonable period of time. But if the client already is short when it comes to meeting basic needs, adding or raising a mortgage payment is not advisable.
A better option may be a home-equity line of credit. This type of debt is easier to set up and avoids the fees associated with a mortgage. Funds need be accessed only when required and can be repaid without the traditional prepayment penalties and conditions of a mortgage.
The main disadvantage to lines of credit is that the interest charged is always variable, so you can’t lock in at a specific rate the way you can with a mortgage. Another potential pitfall is that your client may be tempted to borrow more and more over time, as the cost of living rises. With little disincentive not to tap the line of credit, this could lead to problems for the client who lacks spending discipline.
Your client also may consider a reverse mortgage. The main advantage of these is that no interest or principal payments are due until the house is sold. This method also works well for retrofitting the house or other major, one-time expenditures as these, too, can be done without any impact on cash flow.
Reverse mortgages are available for people 55 or older and there’s no medical, income or credit requirements. Usually up to 50% of the value of the house can be borrowed, and the borrowed amount can be taken in a lump sum and/or monthly instalments.
The biggest drawback is that the interest charged on reverse mortgages is significantly higher than for traditional mortgages or home-equity lines of credit. For example, the current rate for HomEquity Bank’s Chip Home Income Plan (CHIP) variable-rate reverse mortgage is 4.99% and the rate for a five-year, fixed-rate reverse mortgage is 5.79% — vs 3.79% for a traditional, five-year mortgage from Manulife Financial Corp.
The theory behind reverse mortgages is that even with relatively high interest rates, the appreciation in the value of the home will partly or entirely offset the interest charged. The CHIP website —www.chip.ca— says: “On average, over 50% of the equity remains at the time of repayment.” IE