For most of us our home our single biggest purchase; and we were raised to believe that paying off our mortgage and owning our home is the key to our financial security. Whilst it is true this is something we should all aim for, how much will home ownership contribute to our lifestyle in retirement?
Much of this thinking came from times of high inflation; in times of low inflation as we have now we need to ask ourselves if our home will appreciate as much as we expect. The real cost of home ownership of course also includes the amount of interest paid over the term of the mortgage, maintenance, rates and insurance. Markets also go down as well as up; consider the impact of a downturn in house prices just prior to your retirement.
Using the Equity in Your Home
To tap into the equity in your home comes with costs; you have to pay the interest costs on the money you borrow against your home. Securing a traditional mortgage after you have retired and no longer have an income may be difficult, so it may be necessary to use one of the reverse equity mortgages that are now available. With these you do not have to pay the interest until your house is sold, the interest will accumulate and could over time account for a good part of the value in your home. Reverse equity mortgages do have a place in your financial planning. If you outlive your retirement savings and are in a later stage of your retirement a reverse equity mortgage can be an excellent vehicle for maintaining your retirement income. However they are best relied on as a backup plan and if used in the later stages of your retirement the impact of the compounding interest is dramatically reduced verses beginning the funding of your retirement this way.
Downsizing your home is of course another alternative. If you have paid off your mortgage then you could sell your home and buy a smaller, cheaper house, perhaps in a less desirable area; living off the freed up capital. Of course you would need to invest the freed up capital wisely so it continues to work for you until you need it. More often than not though the amount of capital released will not fund your entire retirement. At retirement people typically do not wish to trade down as much as they originally thought they would, therefore less equity than expected is released for retirement.
It is possible that your home will provide you with both a place to live in retirement and also some of the equity you need to contribute to your retirement lifestyle. However it is also important to understand that you might not end up with what you expect. You should consider making real estate a part of your larger retirement portfolio. A Personal Financial Plan will help you to determine how your future may look relying solely on your home equity to fund your retirement verses using real estate in a broader portfolio.