Should I downsize or use my home equity for retirement?

Stacey Wild, a Senior Financial Advisor with CIBC in Kelowna, BC, says the first thing Molly needs to do is to sit down with a financial planner and do a “discovery process,” to gather all the pieces of her financial life and put the puzzle together to see “the whole picture.”

With all those pieces in place, the financial advisor can put together a customized financial plan.

“It’ll give us the pros and cons of downsizing compared to other options, such as accessing home equity, to ensure that her decisions are aligning both with her retirement goals and her family commitments — because those will play a factor as well,” Wild says.

Molly needs to consider what her ideal retirement looks like and what’s most important to her, Wild adds. For example, if she wants to spend her time gardening, then a condo may not be the right move, but it might work if she wants to do a lot of travelling. Will the kids need to move back home after their schooling or will her aging parents need to move in for care? All these factors need to be considered.

Wild uses CIBC’s GoalPlanner Opens a new window.. It’s a dynamic advice tool that lets her work through different scenarios with clients to create a plan that meets their financial goals.

“We can analyze your situation and decide: Are we on track for meeting your goals, or do we need to change something? It empowers clients to make informed financial decisions about their priorities, goals and key objectives.”

Wild notes that nothing is locked in and plans can be reassessed as circumstances change. She describes the process as being like building a home. “We’re going to lay a solid foundation, build on top of that, and then we can renovate it any time.”

In deciding whether to downsize or tap into home equity, Molly needs to weigh many factors, from time horizon to costs to real estate trends, says Lisa Avenia, Vice-President of Real Estate Secured Lending at CIBC.

“A downsizing scenario can provide the individual with a lump sum to invest for retirement, potentially lowering overall living expenses and simplifying a lifestyle,” she says. “On the other hand, when you tap into equity through a home equity line of credit, it can give you access to funds while allowing you to stay in your current home and maintain your existing routines and community connections.”

Molly should also consider whether the home she’s currently in can adapt to her needs as she ages, she adds.

The state of the housing market will also play into the decision, Avenia says. If it’s a strong market, selling your home can yield higher returns. “That can be a really attractive option for potentially increasing that retirement nest egg.”

But if the market is softer, you might not gain as much from a sale. There may not be as many suitable properties to downsize to, and they could be priced higher than you want to pay, she says. That’s why it’s important to seek professional advice, she adds.

Avenia notes that selling also means prepping a house for a sale and potential renovations, plus moving, real estate, legal and other costs.

Interest rates will also play a role in the decision. When rates are low, it can be a good time to get a home equity line of credit. But higher rates could make accessing home equity more expensive, which would reduce your retirement cash flow.

You can find out how much you may qualify to borrow through a mortgage or line of credit with CIBC’s Home Equity CalculatorOpens a new window.. Factors such as where your property is located, your home’s appraised value and how much is owed on your mortgage will impact how much you can access. Depending on these factors, you may qualify to borrow up to 80 per cent of your home’s appraised value as a mortgage and 65 per cent of your home’s appraised value as a line of credit.

Scott McGillivray, real estate expert and host of the HGTV show Income Property and CIBC ambassador, says that “right sizing” your property can offer a lot of benefits. First, you can trim your living costs, from taxes to utilities to insurance to maintenance. You may end up in an area with neighbours who have a similar lifestyle, he adds.

“That’s what I like about right sizing — you’ve got some cash, you still fully own your home, you have reduced your expenses and you’re probably in a more appropriate home for the part of your life that you’re in,” he says.

McGillivray acknowledges that many people prefer to stay in the homes they have lived in for years and wish to avoid the stress and cost of moving. In that case, he says tapping into a home equity line of credit may make more sense. But it’s important to remember that you are creating a debt that needs to be serviced, he adds.

Retirement can be a good life stage for right sizing because you can take your time looking and getting familiar with the options available because you’re not under any time pressure, Mr. McGillivray says. Factors like the school district won’t matter, and you don’t need to worry about proximity to work. “You have more flexibility, which means you can shop around for better prices,” he says.

Timing can be key when selling a home, Mr. McGillivray says. Today’s soft real estate market isn’t ideal for downsizing, so it may not be the best time to rush into selling. He recommends beginning your search a few years before you plan to move so you can check out multiple areas and types of homes — from condos to townhomes to smaller homes — so that you know the inventory that is available.

Also, go see properties in person, not online, he says.

“There’s no cost to shopping for properties, it’s free.”