The Plan by Investors Group^TM

Lifestyle and home equity: It's an important decision

If you've reached your mid-fifties or beyond, you're probably in the enviable position of owning your principal residence debt-free.

Depending on the retirement lifestyle you'd like, there are many possible uses for the substantial equity you've built up in your home. Should you sell your home to tap into its equity? If you do sell, what's the best accommodation option for you? Here are a few factors to keep in mind when you consider this decision.

Pros and cons of selling

If your kids have grown and left the nest, you may find your home too large and its upkeep too expensive for your current situation. The mortgage may be paid off, but there are property taxes, insurance, repairs and heating expenses. In general, the larger the home, the higher the maintenance costs.

On a strictly financial basis, selling may make sense. "Capital gains on the sale of a principal residence are generally tax free," says Tannis Dawson, CA and Manager of Advanced Financial Planning Support at Investors Group. "If your retirement lifestyle is using up more of your retirement savings than you thought, a new source of capital could be welcome news."

Trading down to a smaller, less expensive home would still allow you to use a portion of your home's equity to fund your retirement income needs. However, your home is more than just a source of capital. Selling your home can also mean leaving a place that contains many family memories. In some cases, the intangible benefits of home ownership can outweigh the financial benefits of selling.

"You should consider the estate planning implications of selling," advises Dawson. "If you hope to leave assets to one or more beneficiaries upon your death, your home may represent the primary source of their inheritance."

If you do sell

While trading down to a smaller home is a popular choice for many, there are other options you may want to consider.

Renting. By moving into a rental property, you can reduce your direct maintenance costs and property taxes to zero. And you have the flexibility to change accommodations more easily. This may also be an attractive option if you want to spend some of your time down south during the winters.

However, by renting, you forfeit some degree of control. Your landlord is usually the one who decides when and whether repairs need to be done. If you have owned property for much of your life, you may find the loss of control difficult.

Condominiums. If you previously owned a house, you'll find that condos are generally less expensive to purchase. To some degree, this will depend on the area in which you choose to live and the condo's maintenance fees. Not having to shovel snow and cut the grass may also be an attractive feature of condo ownership.

However, there are disadvantages. Most condos have restrictions on the type of décor and renovations they'll allow, and you could get hit with significant additional fees if the condo corporation decides to undertake major repairs or build new facilities. In addition, the resale market for condos is not as strong as that for homes.

Life Lease. As a less expensive alternative to ownership, a life lease provides you with greater security than rental accommodation. You enter into a lease with an organization that's sponsoring a development. The terms of the lease may vary, but it will often last for your lifetime. You may also have the right to sell your interest to someone else, although the sponsor usually has the right of first refusal on any sale. (Note: This type of life-lease arrangement is not available in Quebec).

Your Investors Group Consultant can help you weigh these factors in the context of your retirement income needs and your desired lifestyle.

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Written and published by Investors Group as a general source of information only. It is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax, legal or investment advice. Readers should seek advice on their specific circumstances from an Investors Group Consultant.