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25 Nov

IS YOUR HOUSE YOUR RETIREMENT PLAN OR IS THERE A BETTER WAY?

General

Posted by: Mike Hattim

Paying off your home should be a priority, no arguments there. Are you concentrating on that goal so much that other retirement savings plans are on the back-burner until you’re comfortably mortgage free? Does this give you a level of diversity that protects you from economic or market fluctuations?

There are two schools of thought on this issue. One is that if you are mortgage free not only will you have a low cost home when you retire, you will have a large asset that will hold its value and give you a reliable nest egg when you’re ready to down-size. That’s definitely a solid plan.

The other view point is that by putting all your eggs in one “nest” this means you are limiting your ability to maximize on other, possibly more lucrative, investment vehicles that could put you further ahead come retirement.

If you are making extra payments towards your mortgage but not investing in an RRSP, is that the best way to go? If you put lump sum payments on your mortgage or double up or increase payments regularly, you could be shortening the life of your mortgage at the cost of other benefits.

For example, if you were to invest in an RRSP, the tax break you get by way of a refund would make a nice little lump sum mortgage payment each year, while building up a tax deferred savings account.

Another option, if you have significant equity in your home, is to get your home working for you.

Home Equity Lines of Credit (HELOCs) are separate from your actual mortgage. They give you on-going access to your equity. The Government of Canada restricted HELOCs to 65% of your home’s value. But for the right client, the HELOC can be a powerful investment tool.

Being separate from your mortgage, you can use a HELOC strictly for investment purposes and therefore, any interest you pay on funds drawn from that credit line can be written off.

Some savvy homeowners will use a HELOC to buy an investment property with a level of mortgage and property costs that can be supported by the rental income generated from that property. Thus they have a self-sustained investment building yet another nest egg.

Other owners draw on the credit line to make short-term, high-return investments that they then cash in to pay off the credit line and put any earnings from the investment itself back onto their original mortgage. The Smith Manoeuvre is a shining example of this technique.

There are lots of different ways to look at the retirement issue and each plan needs to be built around your lifestyle and goals. A comprehensive analysis by your Dominion Lending Centres mortgage professional, a financial planner as well as a consultation with your accountant is highly recommended.