Role of Equity in Retirement

There are a number of definitions for the word “Equity”, which includes being fair and impartial in the legal context. Then in the business world it refers to ownership in its simplest concept. The stocks and shares of a public company such as Dollarama are traded on the “Equity” market. The statement : “A balanced portfolio has 50% Equities and 50% Fixed Income” is alluding to having some equity stake in companies with your investment. And how about the “Equity” in your home or real estate? This again is referring to the value of what you own in the property after accounting for the mortgage amount.

Retirement Planning with “Traditional” Equity

Most of retirement planning conversations tend to focus on the equity/stock market as well as mutual funds and Exchange Traded Funds(ETFs) which are all financial assets to grow and accumulate for spending in retirement. I will refer to this as your traditional equity and involves an investment portfolio you grow over time with an institution. On the other hand, there is less attention on the other obvious equity in someone’s real estate portfolio.

Retirement Planning with your “Other” Equity

The role of real estate equity is not new in Canada and was mostly around downsizing where the retire sells the property and moves to a rental or into smaller home with the difference to invest. With an expensive real estate market in Canada this has current and future implications about the role of real estate equity in retirement planning. It has become challenging to downsize because those smaller homes have run up in price reducing the difference the homeowner walks away with. Alternatively, using the equity while living in the house can be done by borrowing with a credit facility such as a Home Equity Line of Credit, conventional mortgage or Reverse Mortgage. These are not unique to Canada but variations exist around the world to assist retirees.

USA - The Land of Reverse Mortgages

In the USA, reverse mortgages are so popular that they might as well be called the official retirement plan. In fact, the government FHA approved lenders issue a version called the Home Equity Conversion Mortgage (HECM). It's so popular that you'll often hear advertisements on TV and the radio, featuring a friendly spokesperson who will tell you how you can turn your home into a piggy bank.

?Japan - The Reverse Mortgage Samurai

In Japan, reverse mortgages are known as "jibaiseki," which literally means "land-price repayment." It's a bit of a mouthful, but it reflects the fact that property prices in Japan have been declining for years. Reverse mortgages are a way for retirees to tap into their home equity without having to worry about their property values. But in a country where samurai and honor are still held in high regard, reverse mortgages are seen as a last resort. It's like drawing your sword as a last resort in a battle.

Australia - The Reverse Mortgage Kangaroo

In Australia, reverse mortgages are called "equity release" products. One of the main providers is a company called Seniors First, which offers a product called "the Seniors First Lifetime Loan." The product features a kangaroo in its marketing materials, which is a nod to the country's national animal. It's like the kangaroo is hopping in to save the day for retirees who need a little extra cash. And if you're not careful, you might end up hopping around too, trying to keep up with your bills.

United Kingdom – Royal Mortgages

In the United Kingdom, reverse mortgages are a bit of a mystery. They're not widely available, and there's not a lot of information out there about how they work. But if you do manage to find a lender who offers reverse mortgages, you'll be able to borrow up to 50% of the value of your home. And who knows? Maybe the King will even send you a congratulatory letter.

?Canada - The Polite Reverse Mortgage

In Canada, things are a little more polite. The government has a reverse mortgage program called the Canadian Home Income Plan (CHIP), which is run by a company called HomeEquity Bank. The company's slogan is "the polite Canadian way to access home equity," which is a far cry from the brash American approach. Instead of using your home equity to buy a Harley Davidson or go on a cruise, in Canada, you might use it to take a trip to visit your grandchildren.

Future of Retirement for Canadians

With the high price of real estate in Canada and new home owners mortgages close to $1million, then compounded with much higher interest rates that have extended amortization I wonder if most people will be retiring with mortgage debt in 20 or 30 years from now. They may result in more creative retirement planning and adoption of untraditional tools such as reverse mortgages. We explored these options in a webinar few years ago titled “Dilemma of the Downsizing Decision” which you can watch here .

Conclusion

The key is to be aware of the existence of this option and I do not share this to imply someone “should”, but want clients and the community to know they CAN. As the year draws to a close, I wish you all the best and appreciate you being part of this community of curious folks with the Saturday Tips. As always let’s connect one on one to discuss questions you may have.

Orlando Lopez,CFP,CIM,CIWM Book a Meeting Upcoming Webinars