Simple Retirement Plan
• Buy house for $700,000
• Pay down mortgage over 10 years to $350,000
• Sell for $1.4 million
• Retire.
In 2002, the average residential detached house price was $320,000 in Greater Vancouver, according to the Central 1 Credit Union. By last year – 10 years later - the price had more than doubled to $738,000, even with the financial crisis in between.
That is why one mortgage expert argues that it is possible for someone to retire on the equity in their house, despite concerns about homeowners becoming overextended.
A recent Bank of Montreal retirement report pointed out that more Canadian Baby Boomers are using their home as their retirement fund. The BMO study shows the baby boomer generation were not downsizing like many experts were thinking. But instead, they are buying bigger, more expensive homes. The thinking is that the higher priced homes will grow their retirement fund more quickly and more securely.
Several financial experts commented on this study, with most warning that it was not a good idea.
Yet, the 10-year plan has grown in popularity over the last five years as homeowners have seen the value of registered retirement savings plans and other investments drop in value.
Mortgage professional Steve Garganis, writing in Canada Mortgage News argues that buying a house as a retirement hedge can be a smart strategy.
“It is capitalizing on real estate values going up over the long-term,” he said, “It’s really simple to understand.”
Here’s an example of what one couple could do,(based on a real life example of one of Garganis’ clients).
Let’s say you’re between the ages of 35 and 55.
• You own a home worth $500,000
• You have a $300,000 mortgage, but you can afford to buy a $700,000 home.
• You buy the home and your new mortgage is $500,000.
• You are committed to keeping that home for 10 years, and you can afford the payments. In that 10 years, the goal is to pay down your mortgage by at least half, if not more. (A realistic goal considering the average Canadian pays off their home in 12 to 17 years) if your home goes up by 5 per cent each year, on average (a realistic number looking back at historical values), then your home should be worth $1.4 million, or double what you paid, Garganis explains.)
• The 10 year timeframe is critical, since you want to allow enough time to live through any up or down real estate market.
Using the example above, in 10 years you should have a mortgage of $350,000 or less and house worth $1.4 million… that’s $1 million of equity in your home. And it is all Capital Gains Tax free.
“Does it sound too easy or too good to be true? It’s really not,” Garganis explains. “Take any 10-year period in history and work out your own stats. This is reality.”
