Do You Need Time For Your Retirement Investments To Recover?
Diane Gogar • August 4, 2020
COVID-19 is wreaking havoc on retirement investments, particularly for those who rely on dividends as part of their income. Over the past decade, many older Canadians have taken a riskier approach with retirement investments because of low bond yields and interest rates caused by the financial crisis in 2008.
Instead of playing it safe, many retirees have turned to the stock market for better returns and dividend income. With global markets in a highly volatile state due to the pandemic, right now it is challenging to move investments to safer ground, and many companies have put dividend payments on hold.
If you need immediate cash to ride out the remainder of the pandemic, you may think you need to liquidate some investments. But what if there were other options that can provide the much-needed cash without taking investment losses? Consider borrowing from your home equity instead of liquidating investments prematurely. Here’s why this makes sense.
Take advantage of low interest rates
Uncertainty in the economy has caused the government to lower interest rates. Mortgage rates are at historic lows, and borrowing money at this point in time doesn’t cost a lot. By gaining access to your home equity through mortgage financing, you can somewhat bridge the gap. You can increase your cash flow until the markets, economy, and your investment portfolio recover.
Historically, stock markets have always recovered.
Bloomberg’s Canadian retirement expert Dale Jackson explains, “The S&P 500 lost half its value between October 2007 when the meltdown began and its March 2009 bottom. By October 2013, the S&P 500 topped its pre-meltdown high and has since doubled from there (pre-pandemic). It wasn’t until June 2014 that the TSX topped its pre-meltdown high. It has since rallied an additional 20 per cent (pre-pandemic).”
If the markets recovered both the Great Depression and Great Recession, there’s little reason to fear it won’t happen post-pandemic. The timing of the recovery, however, is uncertain.
Strategically tapping into home equity
You may be reluctant to use home equity to provide for living expenses until the post-pandemic economy recovers. And that is understandable. You worked hard to pay off your mortgage, why would you want a new one?
Well, if you’re faced with the choice of selling investments at a loss, or borrowing against your home equity to give yourself time to bridge the current cash flow gap and allow your investments to recover, it really becomes a matter of calculating the dollars and cents.
This is where expert financial planning comes in. You should be considering ALL your options, not just the ones we’ve been conditioned to consider over the years.
Unfortunately, there is no guidebook for navigating a global pandemic. However, there are options you can consider, now is a good time to consider them.
Reverse Mortgage
If you’re 55+ and occupying your home as your primary residence, you should seriously consider a reverse mortgage. It’s the ultimate mortgage deferral option.
You’ve likely seen commercial ads for reverse mortgages. And while some people think this is a risky way to access funds, if you intend to live in your home throughout your retirement years, it can be an inexpensive source of funds. Especially given our current low-rate environment.
One common misconception is that the bank owns your home if you get a reverse mortgage. This just simply isn’t true. A reverse mortgage is like any other mortgage, however, instead of making regular payments, the mortgage amount increases each year and is due when you choose to sell your house.
Other mortgage options
If you’ve got a steady pension income, you may be able to qualify for conventional mortgage financing. However, if you’re still paying off your first mortgage, you can apply for a second mortgage based on the remaining equity in your home.
It should be noted that a second mortgage is a high-risk option with significantly higher interest rates. If you’re cash-strapped already and are having trouble making payments on your first mortgage, there’s no benefit gained by adding a second payment.
Another option to consider is a Home Equity Line of Credit (HELOC), which operates much like a bank overdraft. It’s a pool of funds attached to your home that can be used when cash flow is low and paid back when cash flow improves. Interest rates are typically low because the line of credit is secured by your home equity. Further, interest is calculated based on actual borrowing not on the amount approved.
Avoid Fear-Based Decisions
Making fear-based investment decisions rarely work out. Because these are uncertain times, it’s important to consult with financial experts to discuss your options and allay your concerns.
Remember you’re not alone. Millions of Canadians are in similar circumstances. There are options. As part of a solid financial plan, using your home equity can provide funds that act as a bridge to avoid investment losses until the economy and market recover.
If you’d like to discuss your financial situation, contact me anytime for a free consultation. I would love to work through all your options with you!
There is no doubt about it, buying a home can be an emotional experience. Especially in a competitive housing market where you feel compelled to bid over the asking price to have a shot at getting into the market. Buying a home is a game of balancing needs and wants while being honest with yourself about those very needs and wants. It’s hard to get it right, figuring out what’s negotiable and what isn’t, what you can live with and what you can’t live without. Finding that balance between what makes sense in your head and what feels right in your heart is challenging. And the further you are in the process, the more desperate you may feel. One of the biggest mistakes you can make when shopping for a property is to fall in love with something you can’t afford. Doing this almost certainly guarantees that nothing else will compare, and you will inevitably find yourself “settling” for something that is actually quite nice. Something that would have been perfect had you not already fallen in love with something out of your price range. So before you ever look at a property, you should know exactly what you can qualify for so that you can shop within a set price range and you won’t be disappointed. Protect yourself with a mortgage pre-approval. A pre-approval does a few things It will outline your buying power. You will be able to shop with confidence, knowing exactly how much you can spend. It will uncover any issues that might arise in qualifying for a mortgage, for example, mistakes on your credit bureau. It will outline the necessary supporting documentation required to get a mortgage so you can be prepared. It will secure a rate for 30 to 120 days, depending on your mortgage product. It will save your heart from the pain of falling in love with something you can’t afford. Obviously, there is nothing wrong with looking at all types of property and getting a good handle on the market; however, a pre-approval will protect you from believing you can qualify for more than you can actually afford. Get a pre-approval before you start shopping; your heart will thank you. If you’d like to walk through your financial situation and get pre-approved for a mortgage, let’s talk. It would be a pleasure to work with you!
Refinancing your mortgage can be a smart financial move, but how do you know if it’s the right time? Whether you’re looking to lower your monthly payments, access home equity, or consolidate debt, refinancing can offer valuable benefits. Here are five key signs that it might be the right time to refinance your mortgage in Canada. 1. Interest Rates Have Dropped One of the most common reasons Canadians refinance is to secure a lower interest rate. Even a small decrease in your mortgage rate can lead to significant savings over time. If rates have dropped since you took out your mortgage, refinancing could help you reduce your monthly payments and save thousands in interest. ✅ Tip: Check with your mortgage broker to compare your current rate with today’s market rates. 2. Your Financial Situation Has Improved If your credit score has increased or your income has stabilized since you first got your mortgage, you might qualify for better loan terms. Lenders offer lower rates and better conditions to borrowers with strong financial profiles. ✅ Tip: If you’ve paid off debts, improved your credit score, or increased your savings, refinancing could work in your favour. 3. You Want to Consolidate High-Interest Debt Carrying high-interest debt from credit cards, personal loans, or lines of credit? Refinancing can help consolidate those debts into your mortgage at a much lower interest rate. This can make monthly payments more manageable and reduce the overall cost of borrowing. ✅ Tip: Make sure the savings from refinancing outweigh any prepayment penalties or fees. 4. You Need to Free Up Cash for a Major Expense Many Canadians refinance to access their home’s equity for renovations, education costs, or major life expenses. With home values rising in many areas, a refinance could help you tap into that value while still keeping manageable payments. ✅ Tip: Consider a home equity line of credit (HELOC) if you need flexible access to funds. 5. Your Mortgage Term is Ending, and You Want Better Terms If your mortgage is up for renewal, it’s the perfect time to explore refinancing options. Instead of simply accepting your lender’s renewal offer, compare rates and terms to see if you can get a better deal elsewhere. ✅ Tip: A mortgage broker can help you shop around and negotiate better terms on your behalf. Is Refinancing Right for You? Refinancing isn’t always the best move—there can be penalties for breaking your current mortgage, and not all savings are worth the switch. However, if you relate to any of the five signs above, it’s worth discussing your options with a mortgage professional. Thinking about refinancing? Let’s chat and find the best option for you!
