Thinking of remortgaging your home to invest in your retirement goals? First of all: yes, it’s possible. Second, you just have to explore the available options, weigh the pros and cons… and make an informed decision. Follow our guide!
First, do you say you’re “remortgaging” or “refinancing” your home? Either one works; in fact, they mean the same thing. You can also refer to it as mortgage refinancing. Now let’s get down to business.
Regardless of the terminology you use, the way it works remains the same. Refinancing your home allows you to use the net value or equity of your property to borrow money. By the way, the net value or equity refers to the difference between your property’s current value and the remaining balance on your mortgage.
Another important point: you can borrow up to 80% of the value of your property… minus the balance of your current mortgage, of course!
More of a visual person? No worries. Here’s an example: let’s say your house is worth $300,000 and you have $150,000 left to pay on your mortgage. If you refinance it, you can borrow an additional $90,000: ($300,000 x 80%) - $150,000 = $90,000.
Your debt will therefore be revised to $240,000, which amounts to the current balance on your mortgage plus the amount you’ve newly borrowed.
The correct answer to this question is: maybe. If, over the years, you’ve accumulated contribution room for your RRSP, you could refinance your mortgage to collect funds and contribute them to your RRSP to ensure a more comfortable retirement.
“You’ll get a tax deduction on your current income and the investment will be tax-sheltered,” explains Mohamed Wakkak, financial planner at the National Bank.
This strategy is recommended especially for people aged 60 or over who are very close to retiring. But it all depends on your overall financial situation. This option should be evaluated with the help with a specialized retirement advisor.
“A house is an asset, but it’s not a liquid asset,” highlights Mohamed Wakkak. So you shouldn’t count on it as a pure source of income to finance your retirement.
You could also refinance your mortgage to invest in something other than an RRSP. This strategy could prove beneficial if you want to finance an opportunity, like investments or buying rental property. “First, you need to determine how much profit refinancing would bring you,” advises Mohamed Wakkak. “Once that’s been calculated, you can get a better picture of the impact of each action.”
Do you actually need one-time financing to repair the roof of your home, for example? “Refinancing your mortgage could allow you to collect the funds without having to withdraw funds from your investments,” adds the expert. “Sometimes it’s better to do this rather than withdraw invested assets that generate earnings, especially when your house is debt-free,” adds Mohamed Wakkak.
However, if you have recurring financing needs, know that there are other options for maximizing your retirement income that don’t involve refinancing your home. That’s why it’s very important to have a retirement plan and to meet with an advisor to explore all avenues.
If you’ve accumulated debts with high interest rates, you could consolidate them into a mortgage loan as long as you’ve already paid off part of the capital.
You could then save on interest or extend your loan period, thus reducing your monthly payments. But careful – you’re still taking on new debt. Don’t lose sight of this!
“You could add an extra $20,000 to your loan, as an example, without having to cancel your mortgage and sign up for a new one,” explains Mohamed Wakkak.
Thinking of getting a reverse mortgage? A piece of advice: meet with a specialist to learn more about it, and do the math. Not all financial institutions offer this option.
Are you familiar with home equity lines of credit? They could be a good alternative to a reverse mortgage. They could give you access to up to 65% of your property’s net value, meaning its value minus the remaining balance on your mortgage. This could allow you to finance your retirement goals without having to change your mortgage agreement.
The other advantage to this type of line of credit is its flexibility. You can withdraw the money whenever you need. You also decide on the payment frequency and amount.
Finally, depending on your situation, mortgage refinancing may be a good idea. Before jumping in, it’s in your best interest to meet with your advisor – they’ll be able to help you choose the best strategy to invest in your retirement goals.
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