When Should Retirees Sell their Home?

When Should Retirees Sell their Home?

Photo: Alan Cleaver

As a retiree, when is the right time for you to sell or downsize your house? In many cases, new retirees have owned their homes for decades and seen it increase significantly in value. Many are depending on it to help fund their retirement choices as well. With all this talk about housing bubbles in Canada, how do you know when the right time to sell your house is?

The answer depends on the kind of retirement strategy you already have in place:

1.      Do you have other retirement income to cover your needs?

If you do not need the equity of your home to fund your retirement, you should not worry too much about timing the sale of your house. Emotional factors about the memories created in your family home, the stress of moving to a new neighbourhood and other “readiness” concepts should be explored instead.

2.      Are you planning to sell your home or downsize to help fund your retirement?

In this case, consider putting your house in the market within the next year if you plan to take the proceeds. Despite the fact that there is much controversy about a potential “housing bubble” and the future of the housing market, all that is guaranteed is the value of your house today. Selling now brings certainty (within a few percentage points) of the financial value of your home – and what you can count on for retirement planning and expenses. As with all financial questions and decisions, there is some value in certainty and guarantees. If you are going to sell anyway, sell now.

3.      Do you require the home equity to help fund retirement, but are not ready to sell?

If you do not feel forced to sell your house now, but you still need help funding your retirement, you should ensure that you have a sizable home equity line of credit available to you if you need it. This will allow you to draw money out of the equity in your home if needed and to wait until you are ready to sell.

For a different perspective, read and watch the video on the High Cost of Owning a Home.

Getting Mortgage Insurance? Consider This First


Mortgage iBe Wary of Mortgage Insurancensurance is one of the most important decisions when buying a new home, but unfortunately, many people do not consider it carefully.  Many mortgage representatives at the big banks will always tell you to get mortgage insurance. Stressed, vulnerable and without having shopped around for insurance, many new homeowners say “yes” without a second thought. After all, insurance is meant to protect you, right?

Not quite.

What exactly is mortgage insurance?

The bank’s mortgage insurance is also known as Creditor Protection. What this means is that the beneficiary of the insurance policy is the bank.  In the event of death, the bank is repaid the mortgage loan but surviving family members receive no funds from the insurance (except for a mortgage-free home). Depending on your mortgage and personal situations, it may not be in your best interests to pay off your entire mortgage. Concerns about property taxes and income may force your family to sell the house.

Important Facts about Mortgage Insurance

  • Bank mortgage insurance is usually more expensive than the same product through an independent insurance advisor.
  • It may be cancelled at the bank’s discretion if you move to another financial institution, default on or pay off your mortgage. The insurance is also not guaranteed at your mortgage renewal
  • The insurance only covers the value of your mortgage. For example, if you pay off your $400,000 mortgage to $250,000, upon death, you will only receive $250,000. However, the premium stays the same and does not decrease in conjunction.
  • The banks perform “Post Claim Underwriting” meaning medical issues are explored on claim (i.e. after a person dies), leading to a higher chance of a claim being denied

What is a better alternative?

The right type of life insurance product can ensure that your beneficiaries have enough funds to take care of your mortgage, property taxes and other financial needs as they arise, as well as the flexibility to use the funds as necessary. When in the market for a house, apply for insurance outside of the bank right away (and waive the bank’s mortgage insurance) to protect your home and family.  In addition to dealing with realtors, mortgage representatives and a home inspector, when buying a new home,  include a licensed Insurance Advisor who can help you with this.

If you liked this article, learn more about different insurance products: The Difference Between Critical Illness and Disability Insurance.


Is Canadian residential real estate overvalued?


Real-Estate-Overvalued-CanadaI was at a dinner party recently and the topic came up; “We’re renting, just waiting for property prices to tank” said Bruce. “Well this house has been our best investment ever, we built it 14 years ago and have watched it go up every year since” quirked Janice.

The debate on peaking property prices is now commonplace as we all wonder just how much longer we can expect things to remain good when so many countries have experienced such dramatic property price destruction.

The so called double dip in US home prices is here. On average home prices are selling at the same values that they were nine years ago, which are 34% below their 2006 peak. (Source: S&P’s HousingViews blog).

The Standard & Poor’s/Case-Shiller 20-city housing Index shows that the housing market remains in a protracted and horrendous bear market wherein housing prices have continued to fall.

Case-Shiller noted that prices fell in 18 of 20 major cities in the US in March and of those 18 the prices in 12 of them fell to levels not seen since 2006.

This is not good for US banks, among others. S&P calculates that a double dip in home prices could cost US banks an additional $70-80 billion in loan losses.

The man who called the last two bubbles, Mr Baker, calculates that U.S. home prices still have 10% to drop. He wrote; “given the continued near-record vacancy rates and huge inventory of homes in the foreclosure process, there is no reason to think that house prices will stop falling anytime soon.”

But what of Canada’s real estate market? He said; “I would be very wary in markets like Canada. In fact, I would be very, very wary.” (G&M June 4th 2011)

The Economist magazine’s latest survey of global home prices claims that Canadian real estate is overvalued by a staggering 23.9 per cent.

The Economist determines fair value by comparing the current ratio of house prices to rent with the long-term average, which is one of the major, fundamental determinants of house prices.

By that measure, Australia led the way among the overvalued markets, with homes 63.2 per cent more expensive than they should be, followed closely by Hong Kong, where the housing market was 58.1 per cent overvalued. By comparison, the Economist says real estate in the United States is undervalued by 2.1 per cent, and houses in Japan are 34.6 per cent cheaper than their fair value.

The magazine says Canadian home prices rose by 4.5 per cent over the past year, and gained 70 per cent between 1997 and 2010.

Canadian real estate has become very expensive as evidenced by the ‘house price to income’ ratio, which is at its peak, 40% above its long term average. The translation is that our houses are too expensive relative to our incomes.

The United States had a similar spike only to have this ratio fall back to normalized levels and we should expect that Canada will be no different.

We recently featured the TVO Agenda program that made a strong case for renting given the many hidden costs of home ownership and demonstrated the rates of return of equity markets clearly favor not owning a home, see “A case against home ownership”.

The April 2011 issue of the Toronto based Post City Magazines, published the result of a roundtable discussion on the future of our real estate market. There is no mentioning of science or complex mathematical modeling; however, the discussion is diverse and informative. Click here to read the full story and then decide for yourself.

A December 2010 report on Canadian home prices concluded that;

‘Though overpriced, the absence of widespread speculation and egregiously loose credit standards suggests the market is not in a bubble. Instead, Canada’s housing market remains reasonably affordable because of exceptionally low interest rates. Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur. The greater risk could be that sustained low interest rates might recharge the housing market and inflate a true bubble that ultimately bursts when rates normalize.’

(Source: TriDelta News)

The High Cost of Owning a Home in Canada

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A recent TVO agenda program claims that there is a strong “case against home ownership”. When examined from a purely financial perspective, there is a high cost of home ownership in Canada. Case after case shows it could be cheaper to rent for many than to try to own their own houses.

Here is an example.

A Toronto property is up for either sale or rent. The listing is for $680,000 and the rental is at $2,700.  At these rates (and considering you take a mortgage), the annual rent is only 4.8% of the sale price. If you attempted for home ownership, this amount would easily be taken up by property tax, insurance, mortgage interest (or opportunity cost), maintenance etc.

The TVO Agenda program, A Case against Home Ownership, discussed this issue amongst a panel of distinguished guests. Here is the full video below, as well as highlights from the show:

Some highlights include:

  • Historical rates of return on investments in housing versus equity markets clearly favour not owning a home. As stated by the economist Professor Shiller, “If there are no other considerations, you want to own a diversified portfolio of stocks and bonds and then rent and you’re putting yourself into assets that have historically done very well in contrast to housing”.
  • Home ownership rates in Canada have climbed steadily since 1970 to a current 68% ownership. This is very much in line with the US rate, currently at 67%. This is however in stark contrast to Switzerland for example that is only around 33%.
  • Society and consumer psychology has evolved to home ownership as the definition of the nuclear family. Given the huge number of single parents, renting a home could become the new trend instead, allowing people to be more mobile.
  • The business of America through government intervention became “housing”, which resulted in much of the recent collapse in many US residential markets.
  • Demographic trends dictate that Baby-boomers will be dumping their houses in exchange for town houses, condo’s and seniors homes

We generally believe that much depends on your life stage, but that the staggering rise of house prices in Canada over the last few years suggests that if you don’t own, it’s probably a good idea to keep renting for a while.

Critics like Professor Milevsky of the Schulich School of Business still point out that the argument for or against home ownership is too financially focused.  “It’s (the debate) lost the qualitative lifestyle aspect that should drive the decision.”

If you liked this article, read the 5 reasons why it may be better for you to rent instead of own your cottage.

Should I Sell my Cottage and Rent Instead?


Benefits of Renting instead of Owning Cottage Ever wondered if you should hang on to your cottage or sell it? What are the benefits of renting a cottage instead of owning it?

A cottage brings great joy to many people, but along with the joy can be a fair bit of grief. The more clients we talk to, the more we hear people complaining about the upkeep and the cost, and the family squabbles. There must be a better way. Today, there is a way to have your cake and eat it too. Simply type in “cottage rentals” in Google, and you can see thousands of cottages in minutes.

So here now are 5 reasons why we think you should consider selling your cottage and renting:

1. Avoid big tax bills at death. This is one of the biggest estate planning problems. The family cottage was bought for $40,000, 40 years ago. Today it is worth $600,000. The older parents want to keep it in the family and pass it to their 3 children. When the second parent passes, there is a tax bill of $135,000. Only 2 children want to keep the cottage. Only one of the kids has the money available to pay the tax bill. Lots of headaches (although proper insurance planning can help).

2. Avoid big family conflict. Examples abound in terms of one child’s family using the cottage much more than another, and creating conflict. One family looks after the cottage well, while the other leaves everything a mess.

3. Avoid all that work by just renting for 2 or 3 weeks. A window needs replacing, and the deck needs new wood- owning a cottage can be hard work, not to mention expensive (and we haven’t even talked about property taxes!) Instead- rent a cottage and there is no fixing, few worries.

4. By renting, you can easily get the right cottage each summer for your stage of life. The right cottage for a young family is different than for a family with teenagers, which is different than the right cottage for a retired couple.

5. Feel free to see the rest of the country or the rest of the world during the summer. What if you weren’t tied to the cottage? You could take a summer vacation anywhere in the world, whether at a cottage or in the city. You could even use the extra wealth from the sale of your cottage to fund this.

We are not suggesting that selling the cottage is the right decision for everyone, but when you look at the list above, it certainly makes you think. To understand if this is the right option for now, why not try out our “Creation of True Wealth” Questionnaire? It helps you understand what “wealthy” means to you, not in a financial, but philosophical sense. This can help you decide if owning a cottage is part of that equation or not.