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Do You Need Time For Your Retirement Investments To Recover?
Diane Buchanan • Aug 11, 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!
Being a home owner is excellent, having a huge mortgage isn’t. So, if you have a mortgage that you’re looking to get rid of as quickly as possible, here are four things you should consider doing. Accelerate your payments Making the change from monthly payments to accelerated bi-weekly payments is one of the easiest ways you can make a difference to the bottom line of your mortgage. Most people don’t even notice the difference or increased payment. A traditional mortgage with monthly payments splits the amount owing annually into 12 equal payments. Accelerated biweekly is simply taking a regular monthly payment and dividing it in two, but instead of making 24 payments, you make 26. The extra two payments accelerate the paying down of your mortgage. Increase your regular mortgage payments Chances are, depending on the terms of your existing mortgage, you can increase your regular mortgage payment by 10-25%. Alternatively, some lenders even offer the ability to double-up your mortgage payments. These are great options as any additional payments will be applied directly to the principal amount owing on your mortgage instead of a prepayment of interest. Make a lump-sum payment Depending on your lender and your mortgage product, you should be able to put down anywhere from 10-25% of the original mortgage balance in a bulk payment. Some lenders are particular about when you can make these payments; however, you should be eligible if you haven’t taken advantage of a lump sum payment yet this year. Making a lump-sum payment is a great option if you’ve come into some money and you’d like to apply it to your mortgage. As this will lower your principal amount owing on the mortgage, it will reduce the amount of interest charged over the life of the mortgage. Review your options regularly As your mortgage payments debit from your bank account directly, it’s easy to put your mortgage on auto-pilot and not think twice about it until your term is up for renewal. Unfortunately, this removes you from the driver's seat and doesn’t allow you to make informed decisions about your mortgage or keep up to date with market conditions. So let’s talk about an annual mortgage review. Working through an annual mortgage review with an independent mortgage professional is beneficial as there may be opportunities to refinance your mortgage and lower your overall cost of borrowing. By reviewing your mortgage at least once a year, you can be sure that you’ve always got the best mortgage for you! There is no cost involved here, just a quick assessment and peace of mind. If you’ve got questions about your existing mortgage or want to compare your mortgage to options available today, please connect anytime. It would be a pleasure to work with you.
If you’re like most Canadians, chances are you don’t have enough money in the bank to buy a property outright. So, you need a mortgage. When you’re ready, it would be a pleasure to help you assess and secure the best mortgage available. But until then, here’s some information on what to consider when selecting the best mortgage to lower your overall cost of borrowing. When getting a mortgage, the property you own is held as collateral and interest is charged on the money you’ve borrowed. Your mortgage will be paid back over a defined period of time, usually 25 years; this is called amortization. Your amortization is then broken into terms that outline the interest cost varying in length from 6 months to 10 years. From there, each mortgage will have a list of features that outline the terms of the mortgage. When assessing the suitability of a mortgage, your number one goal should be to keep your cost of borrowing as low as possible. And contrary to conventional wisdom, this doesn’t always mean choosing the mortgage with the lowest rate. It means thinking through your financial and life situation and choosing the mortgage that best suits your needs. Choosing a mortgage with a low rate is a part of lowering your borrowing costs, but it’s certainly not the only factor. There are many other factors to consider; here are a few of them: How long do you anticipate living in the property? This will help you decide on an appropriate term. Do you plan on moving for work, or do you need the flexibility to move in the future? This could help you decide if portability is important to you. What does the prepayment penalty look like if you have to break your term? This is probably the biggest factor in lowering your overall cost of borrowing. How is the lender’s interest rate differential calculated, what figures do they use? This is very tough to figure out on your own. Get help. What are the prepayment privileges? If you’d like to pay down your mortgage faster. How is the mortgage registered on the title? This could impact your ability to switch to another lender upon renewal without incurring new legal costs, or it could mean increased flexibility down the line. Should you consider a fixed rate, variable rate, HELOC, or a reverse mortgage? There are many different types of mortgages; each has its own pros and cons. What is the size of your downpayment? Coming up with more money down might lower (or eliminate) mortgage insurance premiums, saving you thousands of dollars. So again, while the interest rate is important, it’s certainly not the only consideration when assessing the suitability of a mortgage. Obviously, the conversation is so much more than just the lowest rate. The best advice is to work with an independent mortgage professional who has your best interest in mind and knows exactly how to keep your cost of borrowing as low as possible. You will often find that mortgages with the rock bottom, lowest rates, can have potential hidden costs built in to the mortgage terms that will cost you a lot of money down the road. Sure, a rate that is 0.10% lower could save you a few dollars a month in payments, but if the mortgage is restrictive, breaking the mortgage halfway through the term could cost you thousands or tens of thousands of dollars. Which obviously negates any interest saved in going with a lower rate. It would be a pleasure to walk you through the fine print of mortgage financing to ensure you can secure the best mortgage with the lowest overall cost of borrowing, given your financial and life situation. Please connect anytime!
DIANE BUCHANAN
Mortgage Broker
diane@dianebuchanan.ca
250-302-2276
#5 - 160 Oliver Street, Williams Lake BC V2G 1L8