Moving Out: Using Home Equity in Retirement is an Emotional Landmine

Do you know someone who is downsizing, specifically to finance their retirement? Perhaps they're renting out part of their home, or selling their home altogether to become renters themselves?

Be kind. It's an emotional, and difficult decision they've made - one that probably wasn't arrived upon lightly, and one they were probably driven to by real need.

The Investor Education Fund (IEF) commissioned a study recently to look at just how much equity Canadians have invested in their homes, and to look at how willing Canadians are to part with their homes, to meet their need for income in retirement.

"We wanted to have a much closer idea of what the relationship was between household wealth and retirement," says IEF president, Tom Hamza. "We knew there was an issue with savings. That's been well documented. The issue of mortgage debt was one that we needed some clarity on," as well, he adds.

Perhaps not surprisingly, the survey found that people are "really attached" to their homes. What is surprising though, is the significant number of those people (half of whom are already retired), who haven't thought about using the equity in their house as a source of retirement funds at all. Four out of 10 said they were unwilling to even consider the option.

Hamza says "this suggests to me that people are trying to avoid thinking about it."

He also points out that such attitudes could have a detrimental impact on the retirement funds people might otherwise be able to access, if they make the decision too late, once interest rates rise, and property values perhaps fall.

"Maybe all this doom and gloom is unnecessary," he says. (Half of those surveyed, told researchers they expect to exhaust their retirement savings within 10 years. See: Avoiding the Retirement Savings Question, for more details.) "There is actually a lot of equity that people need to liberate, or at least think about well and truly, before the market changes."

According to the report, written by Dr. Edwin L. Weinstein, of the Brodesbury Group in Toronto:

• Three out of 10 households have no traditional financial assets - stocks, bonds, GICs or other investment products.

• Six out of 10 homeowners have fully paid off their principal residence. (The study is based on a January 2013 survey of 1,500 homeowners and previous homeowners over age 50, half of whom are already retired. Statistics Canada says just over three-quarters of Canadians over age 50 have homes. In the IEF/Brondesbury sample, the proportion is more than nine out of 10.)

• One quarter say they have savings worth more than their home.

• For more than half, their home is worth more than their savings - three out of 10 say their home is worth at least 50% more than their savings.

And yet,

• Half have never thought about the possibility of selling their home to generate income to live on in retirement. Four out of 10 were not willing to consider any of the related options. "Interestingly," says the report's authors, "people who don't think they have enough retirement savings are less willing to consider any of the options (35% versus 41% overall)."

Such opinions are likely to change as more people are faced with the need to generate income. That said, the report adds that most won't accurately appraise their alternatives until they're confronted with the need to do so - a need which could come sooner than later for some, given that 25% will still have mortgage debt upon retirement. Of those who expect to have mortgage debt on retirement, 25% say they don't know how they will pay this debt off.

Emotionally, people tell researchers that 'staying in my home is critical to my quality of life.' Half say 'the idea of renting bothers me.' One in three want to leave their home to a loved one.

Regardless of age, the report says those who plan to retire in the next two years are the most likely to think about selling their homes, "suggesting that the transition period leading up to retirement is a period of high receptivity to changes in housing."

• One out of six also say they'll rethink their retirement plans after taking the IEF survey.

"The biggest emotional decision is selling off a home and becoming a renter. It takes an enormous force, either economic and/or health-driven, to cross the divide from homeowner to renter," say the report's authors. "While it is clear that the decision to use home equity has a heavy emotional component, the findings make it clear that economics are the primary driver of action. Willingness to use home equity does not translate into corresponding action until economic circumstances drive people to act."

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