Mortgage-Freedom Is Key For Retirees

Front row seat for the sunset 75% of households own a home by retirement, and almost 3/4 of those don’t have a mortgage. That’s according to a Statistics Canada study issued on Monday.

StatCan says, “The economic benefit of owning a home is equivalent to the rent that does not have to be paid.”  And that benefit is significant because, as StatCan notes, net incomes decline by about 45% between a household’s peak earning years and the 70-plus retirement-age class.

Not surprisingly, that makes mortgage-free home ownership a vital contributor to most senior citizens’ effective household incomes.

  1. Hi Rob,
    You may have missed an important point of the study ” as enrolment in pension plans has declined in the private sector and the recent financial crisis has placed greater financial strain on existing plans”
    The problem here is retirees are hoping they can downsize in the future. This means their house is the retirement nest egg. For some this may work out. For others not so much.
    The solution maybe trying to do both paying down the mortgage saving for retirement, putting kids through school replacing cars etc. This requires some planning and what-if questions using, the persons current cash flow. This is not necessarily trying to do the SM., which is not for everybody.
    This, I think in the long run better for the clients, than only looking at the best rates which seem to be what many brokers do.

  2. Hi Brian,
    Thanks for the message.
    The intention of the above article was actually to highlight one particular finding. The implications and reasons leading up to that finding make for quite lengthy topics on their own.
    The decline of company pensions is indeed a factor that has led to seniors’ increasing reliance on home equity. Others include our real estate culture, debt levels, investment performance (or lack of), savings/consumption rates, cost of living, etc.
    As you point out, pre-retirement planning is essential for diversifying and maximizing assets in retirement. Financial advisors typically have a greater role to play in this area than mortgage brokers, but there are still a variety of ways to structure a mortgage to make the best use of cash flow and home equity. This is one of the most important functions of professional mortgage planners.
    Cheers,
    Rob

  3. I hear this a lot, but it doesn’t make sense to me.
    Consider two seniors, one with a $500k house and $500k in other assets, and the second with no house and $1m in assets.
    The 1st senior pays no rent, but has only half the income. The 2nd senior owns no house and pays rent, but has twice the income.
    It seems to me like the only benefit of owning the house is that it is a more tax efficient asset because the 2nd senior’s investment income will be taxed.
    On the flip side, the 2nd senior can invest in higher performing assets (residential real estate has historically performed very poorly compared to equities/bonds) and faces no unexpected house maintenance costs nor 10% transaction costs upon eventual sale.
    i think the message of the Stats Can survey should not be about the benefits of owning a house, but rather about the benefits of adequate retirement savings (and invested appropriately)

  4. While I’m at it…
    as an actuary, I have professional observations on the methodology in the survey…
    – They chart RE prices in nominal and not real dollars.
    -They chart RE prices from 1981-2006, a lengthy, primarily bull market. However they exclude the primarily flat years prior, and the recent dips in certain markets (edmonton, etc)
    -their tables display the higher incomes of home owners compared to renters. But it does not examine the causal relationsip. ie. is the home owner richer because of home ownership, or is the richer person more likely to own a home?

  5. Hi Dave,
    Thanks for the post. I agree that it would have been interesting to see a comparison of buying versus renting. This story by no means should be construed as a recommendation to rely on home equity for your retirement. It’s more of a statement of fact: Many seniors today really do rely on their home value to survive.
    As you and Brian note, early retirement planning is essential. Amassing gobs of equity isn’t always the best path because the return on home equity is 0%. For the right kind of borrower, in the right kind of situation, there may be better strategies than simply paying down a mortgage and letting home equity accumulate until retirement.
    Cheers,
    Rob

  6. Dave,
    I have a calculator on my web site
    http://WWW.rightinsurance.ca
    Under financial tools Person A vs.
    Person B.(who has less money)
    In retirement Person B pays at least 20% taxes and has more cash every year in retirement.
    Stocks and bonds (which I own) can give you subpar returns as well as real estate at different points in time.
    The key is will the retirees want to sell at the same time or in large numbers over the next ten years or so. What will happen to the equity? Only time will tell.

  7. I would disagree with the StatCan statement that “The economic benefit of owning a home is equivalent to the rent that does not have to be paid.” That’s the first part of the equation but we can’t forget the costs (maintenance, taxes, strata, etc.) that come with home ownership over a rental. The economic benefit then is not as great as simply the “rent that does not have to be paid”. As one becomes older, those ownership costs may rise since the owner is less able to do the work themself.

  8. Read the portion of the study that defines “imputed rent.” StatCan addresses your points by incorporating taxes, insurance, maintenance, and depreciation into the “rent” used in that statement.
    Don’t forget that property ownership also entails price appreciation over the long term. This increases the economic benefit of home ownership.

  9. The economic value of home ownership varies dramatically from one community to another depending largely upon the value of the asset in dollars, versus the imputed “rent” value derived from living in the asset.
    In other words, if you live “rent free” in a million dollar home on the west side of Vancouver in a home you could rent for $2500 a month, the return on capital is pretty dismal – something like 3% ROI.
    On the other hand, if you live in a rural property worth may $125,000 that would rent for $1200 a month, the return on investment would be somewhat better – almost 12% ROI.
    Clearly all homes aren’t created equal in terms of derived value.
    The homeowner in Vancouver might be better off if he sold the property and rented, assuming that he could do better than an after tax 3% ROI. Of course if he has good credit, he could obtain an equity mortgage for $500,000, invest the funds in any one of a number of MIC investments across Canada. The cost of borrowing using best rates available should be about 3% and the MICs earn anywhere from 8% to 12%. That homeowner could earn an additional net 5% to 9% (less income taxes) ROI on his home asset. Add this return to the “rental value” of about 3% and the total return on the home could be anywhere from 8% to 12% – rivalling his rural counterpart without having to give up living on the west side of Vancouver.

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