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House as bank machine – or, how to pay your mortgage forever
Our parents bought houses, paid off their mortgages (and had a mortgage-burning ceremony), and then retired.
Those of us who are not yet retired, on the other hand, seem to want to continue paying for our houses long into retirement. What’s going on?
An article by Bloomberg printed in the Financial Post lets us in on the dirty little secret most of us share – we are using the equity in our homes to pay for our lives.
The article warns that Canadians “are ramping up borrowing against their homes even as the real estate market slumps,” a practice that could put our financial system at risk.
According to rating company DBRS, the article notes, home equity lines of credit, or HELOCs, “reached a record $243 billion as of Oct. 31,” an astounding 11.3 per cent of all household debt.
“In the event of a correction, borrowers could find themselves with a debt load that exceeds the value of their home, which is often referred to as negative equity,” the article notes.
An obvious reason for this particular problem is the high cost of owning a home. Houses today can be 10 or 20 times more expensive that what our parents and grandparents paid back in the 1950s and 1960s.
So getting into the housing market is a difficult yet high priority for younger Canadians, reports Yahoo! Finance Canada. One in five younger Canucks admits to not saving for retirement, and instead saving “to afford their property,” the article reports, citing research by Sotheby’s International Realty Canada.
Another eye-opening stat from this story is that 31 per cent of those surveyed dipped into RRSPs for their down payments. That move, possible via the Home Buyers’ Plan, allows one to withdraw up to $25,000 to put towards a down payment if they are a first-time home buyer; the HBP expects the money to be repaid within 15 years. If the money withdrawn is not repaid, the borrower has to pay income tax on it – and the RRSP doesn’t grow back to where it was.
“The dream of home ownership remains compelling for today’s young families, but the reality is that many are facing serious obstacles to achieving this given rising costs of living, rising costs of housing, and other financial needs, such as saving for retirement,” states Brad Henderson, president and CEO of Sotheby’s International Realty Canada, in the article. The piece goes on to report that the number of RRSP contributors “between 25 and 54 years old fell 16 per cent between 2000 and 2013.”
So, let’s arrange these three thoughts together. Those with homes are using them as bank machines. Those without them are making ownership a high priority, over paying off debt and saving for retirement. As a result, retirement savings rates are dipping, and the new home owners may also decide to dip into their home equity to help with cashflow.
Our grandparents succeeded because they kept the concepts of home ownership, debt repayment, and retirement savings separate. They paid off the mortgages, they paid down their debts, and they used the proceeds to save towards retirement.
If, as they say, everything old is new again, it is time these old school concepts were re-introduced.
If you lack a retirement plan at work, and are looking for a way to set aside some of your hard-earned dollars for your retirement future, the Saskatchewan Pension Plan offers all the tools you need to get the job done. Check them out today at www.saskpension.com.
|Written by Martin Biefer
|Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. After a 35-year career as a reporter, editor and pension communicator, Martin is enjoying life as a freelance writer. He’s a mediocre golfer and beginner line dancer who enjoys classic rock and sports, especially football. He and his wife Laura live with their Shelties, Duncan and Phoebe, and their cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22|