Q.
I was divorced three years ago at age 53 and am currently trying to decide when to retire. I’d like it to be sooner rather than later, but I need to decide whether to continue paying a $200,000 mortgage into retirement or sell my home and pay out monthly rent that is greater than my currently combined mortgage and property tax payment. Do you have any guidelines on how to make this decision?
—Many thanks, Charlotte
FP Answers:
Thanks Charlotte, this is a more common question than many might think. Deciding whether to keep a $200,000 mortgage into retirement or sell your home and rent at a higher monthly cost is not just a significant financial choice, it’s a lifestyle choice as well.
There are several factors to consider to help with your decision.
To start, and to compare apples to apples, look at this general rule of thumb: Unrecoverable homeownership costs (including mortgage interest, maintenance costs and property taxes) often amount to about five per cent of the home’s value annually. To compare renting versus owning fairly, compare your annual rent to five per cent of your home’s value. If rent is higher than five per cent, buying or keeping your home may be better financially. But if rent is lower, renting could be better.
For instance, for a home worth about $500,000, five per cent yearly is $25,000, or about $2,080 monthly. Keep in mind that this is a simplified rule and other factors, including appreciation of the home, cash flow, estate preferences and lost opportunity costs by investing in real estate instead of other investment options, should be included in your decision process.
Having no mortgage in retirement offers peace of mind and lowers fixed monthly obligations. But if your
mortgage interest rate
is low, carrying the mortgage while keeping investments (possibly earning more than the mortgage interest rate) may be smarter financially.
As well, selling the home and renting instead frees home equity dollars for other uses and removes maintenance and taxes, but at the same time could expose you to rising rental costs and loss of home equity growth. Many people sell at retirement to improve cash flow and flexibility, especially if planning to downsize or move. Selling frees you from maintenance costs,
property taxes
(the average is typically $2,000 to $4,000 annually in Canada) and home maintenance responsibilities, which can be appealing in retirement. Renting allows flexibility to relocate more easily.
However, rent tends to increase with inflation and market demand, which can be challenging on a fixed retirement income. Those planning to rent should explore long-term leases and rent-controlled options for stability.
Selling converts your home equity into available cash or investments, which could be used for discretionary retirement spending, emergencies, to generate income or for future health care costs. However, relying solely on home value for growth may carry risk if the
real estate
market declines, and investing proceeds elsewhere usually offer more diversification and potentially higher returns.
If your combined mortgage and property tax payments are less than a reasonable rent estimate and you value home equity growth and stability, consider keeping your home with the mortgage. Alternatively, if the burden of mortgage plus taxes versus rent payments feels too high, if maintenance and property management are concerns or you want more financial flexibility and mobility, selling and renting may be the better move.
Don’t neglect to consider your comfort level with debt in retirement and whether owning a home aligns with your lifestyle plans, such as downsizing or moving closer to family. If you plan to sell your home soon after retirement or do not want the burden of mortgage payments without the income growth of working, selling before retirement makes sense to avoid financial strain.
Given your age, divorce three years ago and desire to retire relatively soon, it would be wise to run personalized retirement cash flow projections with, and without, keeping the mortgage. A professional financial adviser familiar with retirement planning can help analyze your specific situation, while taking into account taxes, investment options, government benefits and housing market trends, as well as your future cash flow needs and wants. As well, speaking to a realtor who is well acquainted with your real estate market and with retirees will yield helpful information.
Many retire with a mortgage, but managing that debt into retirement takes careful planning, especially around fixed income and lifestyle preferences. Selling to rent is a growing trend among retirees seeking flexibility and cash flow improvements but it also requires budgeting and planning for potentially higher and rising rent costs. Balancing peace of mind, financial security, and lifestyle goals is key to making the right choice for you.
Janet Gray is an advice-only Certified Financial Planner with Money Coaches Canada in Ottawa.
