House rich: How to access the equity in your home

With the national average home price up a record 18.5% in August 2020 compared to the same time last year, more Canadians than ever have a significant portion of their wealth tied up in their homes.

Who are these “house rich” homeowners? They range widely—from retirees on a fixed income, to baby boomers who’d like to help their adult kids financially, to young parents struggling to save due to the high cost of living and childcare.

Many are now looking at ways to access the  equity in their homes. These include refinancing their traditional mortgage, obtaining a home equity line of credit (HELOC) or getting a reverse mortgage. But how can you determine which option is best for you? To help you decide, we’ve outlined four common scenarios of house-rich homeowners, and how—or if—they should go about tapping into the equity in their properties.

Scenario 1: Pensioners who need to increase cash flow

While lucky enough to have company pensions, these retirees underestimated their post-work cash-flow needs. As a result, they didn’t save or invest in an RRSP, TFSA or other account and now find that their total income (private pension, CPP and OAS) isn’t enough to cover their expenses.

The expert says: Because their income is limited, it’s unlikely these pensioners would qualify for a mortgage or HELOC. But even if they did, it would be difficult (if not impossible) to make the required monthly payments when they already feel stretched too thin. A reverse mortgage, on the other hand, which allows homeowners age 55 or older to access up to 55% of the value of their property, will provide either a lump-sum or regular cash payouts, with no income requirements. Plus, the owners won’t have to make any payments for as long as they continue living in the home and continue to meet their mortgage obligations.

“Of course, the interest is still being calculated and it and the loan will come off the tally of the estate when they die,” says Jackie Porter, a Mississauga, Ont.-based CFP and financial advisor. “But if they don’t have kids or aren’t worried about their estate, it’s an option.”

Scenario 2: Mid-life spenders

A 40-year-old couple bought a $500,000 home with a 20% down payment 10 years ago, with plans to start a family. In addition to the mortgage payments, their expenses now include full-time daycare for a toddler, after-school care for two elementary-aged kids, as well as monthly payments on their two vehicles. They’ve run up their credit cards to help make ends meet and are carrying a sizable balance. Their home is now worth $1.5 million, and they want to use some of the 40% equity they’ve built up to pay down their high-interest credit card debt.

The expert says: The 40% equity in their home is now worth $600,000, so they should be able to borrow against that amount at a favourable interest rate via a HELOC. They can use that money to pay down their higher-interest debt, and because the minimum payments will be considerably lower, they can use the difference to pay down the principal. Porter cautions, however, that a HELOC only makes sense when you’re using the cash wisely. “A HELOC is great for consolidating higher-interest debt or investing in an RRSP, but you need to be careful about using your home as a piggy bank—especially when you’re young.”

Scenario 3: Grandparent gifters

Home-owning seniors with enough retirement income to cover all their current and future needs want to offer their loved ones an early “inheritance” through the equity in their home, but don’t want to move or sell the property.

The expert says: Assuming they plan to stay in the home until they die, a reverse mortgage is a low-risk way to access up to 55% of the home’s value in cash to gift to family members. And because no payments are required for as long as they live in the home, their day-to-day expenses won’t increase. In such a scenario, however, it’s important that the family understands that there may not be much, if any, remaining equity in the house left for the estate. In other words, the heirs need to be happy with perhaps a smaller amount of money immediately, rather than a larger sum later.

Scenario 4: House-purchase helpers

A couple in their early 60s wants to use the equity in their property to help their adult child with a down payment to purchase a home of his own.

The expert says: If they currently have excess cash flow as well as a solid financial plan to support their retirement, Porter recommends they refinance their mortgage. She prefers this option over a HELOC because a mortgage has a specific repayment schedule, which will ensure they won’t carry the debt into their retirement. If, however, their financial circumstances are less than ideal, she would recommend loaning rather giving their son the money, or perhaps doing nothing at all. “There’s a lot of generational guilt because the housing market is so much harder to get into now,” says Porter. “But you need to do the math and figure out if you can afford to help.”

For more information about The Equitable Bank reverse mortgage, and how it might fit into your financial plans, click here.