Rather than take advantage of all their retirement money-building resources, many Canadians invest solely in a home, intending to eventually downsize to a smaller property and thus reap a windfall when they sell. While this may seem like a successful no-fail strategy, there are many uncertainties and potential problems that could make homeownership a perilous path to a carefree, financially-secure retirement.
In general, it’s never a good idea to put all of your (nest) eggs in one basket: spreading out your savings in the best way to safeguard your hard-earned money. Here are some critical considerations and alternate investment ideas for those pondering whether or not relying on home equity is a smart game plans for their golden years.
Home Sweet Home?
To be clear, in general, a home can be a good investment—it just should never be your only investment for a variety of reasons.
Relying on your home’s equity to fund your retirement depends on one big factor: you actually have to sell your house. As we age, our life plans can fluctuate dramatically and we may not embrace change as we once did when younger. Hence, downsizing may become less and less appealing as we get older. A 2018 survey by Ipsos and HomeEquity Bank found that nearly 50% of Canadians approaching their retirement years have no plans to downsize.
Furthermore, according to Statistics Canada, more than one-third of Canadians between the ages of 20 and 34 are living with a parent. When parents have an adult child dependent on them for housing, it becomes even more difficult to move. It’s important to remember that downsizing may not be the straightforward solution to accessing your home’s equity it appears to be.
Interest Rates and Housing Prices
Though we’ve been enjoying historically low-interest rates over the past decade in Canada—which can make financing a home all the more appealing—don’t lose sight of the fact that interest rates aren’t likely to remain low indefinitely. It’s hard to believe, but in the early 1980s, Canada’s interest rates rose upwards of 20%. Additionally, much like interest rates, the housing market can be equally as unpredictable. Notably, Bloomberg is predicting that Canada’s housing prices are in for a big drop in the not-so-distant future.
Home Maintenance Costs
It’s not just the cost of a mortgage that you need to take into account when deciding if a home is a smart purchase. Home maintenance costs are another essential consideration. A general rule is that you should expect to spend between 3 to 5% of the cost of your home on yearly upkeep.
With all of a home’s inherent unpredictable costs and a person’s potential lifestyle changes as they age, it’s clear that a house is not a foolproof retirement savings plan.
Get The Most From Your Mortgage
Though there are numerous drawbacks to relying on your home as your main source of retirement savings, it can be a good investment as one part of a multi-pronged money-saving plan. A key step to ensure that home costs and interest rates don’t eat too much into your savings is by getting the most favourable mortgage possible.
Buying a home is not only a major financial milestone but it’s also likely the biggest purchase you’ll ever make so it’s imperative to take the time to carefully research what institution can offer you the most competitive rates and terms for your investment. Mortgage rates can vary significantly between lenders and depend on factors like whether you want a variable or fixed rate and how many years you hold the mortgage. Luckily, the Canadian financial landscape has changed significantly over the last decade with many discount online banks and credit unions offering extremely attractive mortgage rates in order to compete with Canada’s big five. Take a look in our article on Finding the Best Online Mortgage Lenders in Canada.
Other Investment Strategies
Forget about “location, location, location” – let “diversification, diversification, diversification” be your new mantra. Home equity can play a meaningful role in a retirement plan, but as a home’s worth and eventual sale are not guaranteed, a property should be regarded as only one portion of a well-diversified retirement portfolio. Here are some other stellar savings options that should also feature prominently in your retirement strategy.
Tax-free savings accounts are an incredibly powerful tool for Canadians looking to increase their savings. A TFSA is a tax-exempt registered Canadian account, so any interest it accumulates is yours tax-free. This flexible saving method can hold a multitude of accounts like stocks, mutual funds, GICs, ETFs and more. Or, if you want to avoid taking any risk with your savings whatsoever, a TFSA can also be held as a straightforward savings account. Better yet, the interest rates banks offer for TFSAs are frequently higher than their regular account rate.
Another excellent resource to maximize retirement funds is a Registered Retirement Savings Plan (RRSP). This registered, tax-sheltered account was designed by the government specifically to help Canadians finance their golden years. You put pre-tax money into an RRSP (which often lowers your income tax payment) and only pay taxes on the money when you withdraw it. The idea is that an RRSP encourages people to save because it lowers their reported income and thus their corresponding tax payment. When the funds are withdrawn in retirement the presumption is that a person will pay fewer taxes on the amount because they’ll no longer be earning a regular income and will thus be in a lower tax bracket. Like TFSAs, RRSPs are flexible and can be held in different kinds of accounts.
TFSA vs. RRSP
There are some key differences when it comes to TFSAs and RRSPs, especially in terms of tax consequences, deposit amounts and when account holders can make withdrawals. These differences each have their own part to play in increasing your tax benefits and savings, which is why it’s crucial to spread out your contributions between both options.
The Rewards of Robo Investing
For some people, buying a home is an attractive investment option because, though they’re intrigued by the potential big returns ETFs and stocks can generate, they’re intimidated by investing on their own. If that describes you, then robo investing may offer the perfect solution.
Robo advisors are automated investing platforms that combine the use of computer algorithms and human expertise to create and manage investment portfolios that are based on an individual’s specific needs, risk tolerance and goals. Moreover, these low-cost, passively managed investments have been shown to perform as well or better than expensive, actively managed portfolios. They’re a wonderful hands-off approach to building up equity for those who are inexperienced or too busy to build an investment plan for themselves. Our top picks for robo investing are Wealthsimple and Nest Wealth. Both offer low fees, feature a variety of investment options and are easy to use.
For more experienced DIY investors who feel confident in building their own portfolios, a discount brokerage is an excellent option. These online brokerages let users create self-directed portfolios for a fraction of the fees of traditional online investment firms.
For example, Questrade (which is our favourite discount DIY brokerage) gives users access to a wide spectrum of investments like ETF, bond and stocks for some of the lowest fees in Canada. Despite the low cost, clients still get access to helpful charts, insightful analysis data, tracking tools and more. Right now, with our Young and Thrifty promo, you can start investing and get $50 in free trades.
While a potential wise investment when done responsibly with the right mortgage, a home is not a surefire way to wholly fund retirement. Rather, making judicious use of all the savings and investment options available to Canadians is the smartest path to a fiscally secure future.
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