Part Three: Navigating Your Way Forward Using Property Equity Through Retirement

In the first two installments of this series, we’ve looked at equity and strategies around using a Home Equity Line of Credit (HELOC), also referred to here as a Line of Credit.  Let’s now look at HELOC considerations toward the end of one’s career and into retirement.

Not all HELOCs are created equal.  Selecting a lender whose products work well through retirement can be necessary at this stage.  Having the flexibility not to make a payment if there’s room between the balance and the limit of the Line of Credit can be helpful later in life.  Again, it’s recommended to at least make the interest payment, but there are times when being able to manage cash flow in this way can make financial sense.

Couples borrowing together require special considerations too.  Selecting a lender offering the continued use of a mortgage and line of credit after one partner passes away protects the surviving partner.

Though reverse mortgages are available to retirees and can be a good option for some to access equity for expenses, investments, or to supplement income, and though Lines of Credit have greater approval requirements, a HELOC may still be preferable as:

• There is no minimum use required on a Line of Credit, you only pay interest on what you need
• The rate of interest on a Line of Credit can often be lower than that of a Reverse Mortgage
• The entire amount of the Line of Credit can be repaid without penalty at any time
• Some Lines of Credit are as accessible as chequing accounts, accessing Reverse Mortgage Funds can be more difficult
• Reverse Mortgages come with set-up fees in addition to closing costs and have minimum required withdrawals
• Reverse Mortgages don’t always provide access to as much equity as a Line of Credit can
• Reverse Mortgages are limited to principal residences

As mentioned previously, using the equity in your home can potentially preserve access to Old Age Security.  Liquidating investments can increase your taxable income if the investment gain is taxable.  Increasing your income can impact your ability to collect Old Age Security if your income is bumped above the eligible income amount.  Accessing equity in your home has no impact on your taxable income and preserves your investments from having to be liquidated for use, allowing them to continue appreciating instead.

Always keep in mind, As with any refinance or property purchase, typical closing costs apply when securing a Line of Credit on a property.  In some cases, a fee is charged for the chequing account associated with a Line of Credit, but there are often options to have monthly fees waived.

I hope this series has inspired some ideas and I would be happy to review your requirements to assist you in planning for the future with this tool.  Feel free to reach out at any time for more information.

Image Credit: Tierra Mallorca on Unsplash

Part Two:  Heightened Financial Potential Through Your Property’s Equity: Benefits and Strategies

In the first post of this series, we looked at the concept of equity and the Home Equity Line of Credit (HELOC), also referred to as a Line of Credit here. This second post of this three-part series looks into the reasons why a HELOC is more than just a financial tool and how it fits as a strategic piece of your financial future.

Even those who have other assets benefit from using property equity instead as Lines of Credit can:

• Preserve your investments so they can keep appreciating
• Shield you from paying taxes and potentially bumping up into a higher tax bracket, which can be triggered when liquidating certain investments
• Potentially preserve access to Old Age Security (OAS) in some cases

Setting up a Line of Credit can secure future access to funds and a safety net for things like:

• Staying in your home rather than accessing its value by selling and downsizing or renting
• Accessing the equity in a rental property rather than selling it
• Managing cash flow in retirement
• Funding renovations
• Funding the deposit or down payment on a future property, or future properties, without the need to sell the current property first
• Helping family with down payments
• Making other investments
• Meeting other expenses
• Assisting with cash flow needs prior to selling the property
• Reducing (but not eliminating) the risk of title fraud on your property if you don’t have a mortgage on it
• Raw land purchases and funding construction costs, which can be simplified and more cost effective when funds are obtained through a line of credit on other residential property

Again, it should be noted Lines of Credit are demand loans.  Unlike mortgages with rates secured for a period of time, lines of credit rates can be changed, and lenders can request repayment at any time.  However, those circumstances are rare.

Anyone who looking into a HELOC should apply before they reduce their working income.  Some borrowers can qualify after retirement, but they may not qualify for as much as they might before they stop working.  Setting up a line of credit to plan for future use can be done at any point in one’s career.

You can in some cases apply for a HELOC after retirement, but advance planning before you reduce your income from work allows you to set yourself up to access the most equity possible.

Stay tuned for the last post in this series and in the meantime, for more information, please feel free to reach out any time.

With last Friday’s publication of the anemic second-quarter GDP data, it was obvious that the Bank of Canada would refrain from raising rates at today’s meeting. Economic activity declined by 0.2% in Q2; the first quarter growth estimate decreased from 3.1% to 2.6%.

Today’s press release announced, “The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures.” The Q2 slowdown in output reflected a “marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country. Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers. Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%.”

Lest we get too comfy with a more dovish stance in monetary policy, the central bank warned that the Governing Council remains resolute in its commitment to restoring price stability.

Inflationary pressures remain broad-based. CPI inflation rose to 3.3% in July after falling to 2.8% in June. Much of the rise in July was caused by the statistical base effect. Nevertheless, current harbingers of inflation remain troubling. The increase in gasoline prices in August will boost inflation soon before easing again. “Year-over-year and three-month measures of core inflation are now running at about 3.5%, indicating little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.” The Bank also continues to normalize its balance sheet by letting maturing bonds run off. This quantitative tightening keeps upward pressure on longer-term interest rates. Tiff Macklem and company concede that excess demand is diminishing and the labour markets are easing. The unemployment rate rose to 5.5% in July, up from a cycle low of 4.9%, and job vacancies continue to decline. Net exports have slowed, and the Chinese economy has weakened sharply. Consumers are tightening their belts as the saving rate rose and household spending slowed markedly in Q1. Monetary policy actions have a lagged effect on the economy. As mortgage renewals rise, peaking in 2026, the economic impact of higher interest rates will grow. Homeowners renewing mortgages this year are seeing roughly a doubling in interest rates. The Governing Council will focus on the movement in excess demand, inflation expectations, wage growth and corporate price decisions. Bottom Line The Bank of Canada, though independent, is coming under increasing political pressure. In an unusual move, the premiers of both BC and Ontario have publically called for a cessation of rate hikes. Even so, the BoC is keeping its hawkish bias to avoid a bond rally that could trigger another boost in the housing market, similar to what we saw last April. The government bond yield is hovering just under 4%, having breached that level recently with the release of robust US economic data. There are two more meetings before the end of this year, and many are expecting another rate hike in one of those meetings. The odds of this are less than even, given the downward momentum in the economy. The central bank’s next decision is due October 25, after two releases of jobs, inflation and retail data, gross domestic product numbers for July and an August estimate.

Part One: Unlocking Your Property’s Hidden Value: The Power of Equity

Most real estate might appear to be comprised of four walls and a roof, but beneath the surface lies a hidden gem: your property’s equity. In this series, we’re simplifying the concept of property equity to introduce you to a potentially powerful tool—the Home Equity Line of Credit (HELOC).

A Home Equity Line of Credit (HELOC), also referred to here as a Line of Credit, grants you access to your property’s equity without selling it. Whether it’s your primary residence, a vacation home, or a rental property, a HELOC is one piece of the financial puzzle to increasing your net worth.  Please see our subsequent posts for more on its uses, but first, here’s how it works.

HELOCs differ from standard mortgages.  With a Line of Credit, you borrow only what’s needed, and interest accrues solely on the borrowed sum. Early repayment bears no penalties.  The rate is based on the Prime Rate plus a certain premium.  It should be noted the premium can change at any time and lenders can require HELOCs to be repaid at any time, but those changes and requirements are rare.  Some lines of credit don’t require a minimum interest payment as long as there’s room between the amount you’ve used and the limit.  There are some instances in which this might be useful though it’s best to maintain at least the interest due if possible.

On a property worth $800,000 with a mortgage balance of $300,000, the gap of  $500,000 signifies your equity—a valuable asset.  Should you qualify, lenders can offer stand-alone lines of credit with limits of up to 65% of the value of the property.   Lenders offering mortgages in combination with HELOCs will lend up to 80% of the value of your property as a combined balance.

In our example, 80% of the property’s $800,000 value is $640,000.  As such, your mortgage of $300,000 would leave $340,000 of your equity available as the limit on a line of credit for a total of 65% of the value of your property.  Some lenders will raise the line of credit limit in proportion to the amount you pay down on the mortgage side, to a maximum of 65% of the value of the property.  Once the mortgage in our example is paid to zero, the borrower would then have a line of credit limit of $520,000 available to them, equating to 65% of the value of the property.

A HELOC is more than a tool—used wisely, it can be stepping stone toward a more secure future. You can use it to fund renovations, make deposits on future properties to prevent having to rent between purchases, manage post-retirement finances, or address other expenses—all while retaining property ownership. Anyone who owns property should consider whether a HELOC might be an essential part of their financial portfolio.

Stay tuned for upcoming posts in this series, where further benefits and strategies to leverage this financial tool will be illuminated.  For more information, please feel free to reach out any time.

Image Credit: Tierra Mallorca on Unsplash

I am deeply saddened by the events of the wildfires and their impact on so many this year.  Dealing with the aftermath of a home or property lost to wildfires can be incredibly challenging. If this has happened to you, I express my sincere sympathy and hope these steps can be of some assistance:

1. Contact Your Lender: Notify your mortgage lender as soon as possible about the loss of your property. They will likely have specific procedures and information on how to proceed.
2. Insurance Claim: If you have homeowner’s insurance, initiate the claims process with your insurance company to cover the costs of rebuilding or replacing your property and its contents. Your insurance company will assess the damages and work with you on reviewing compensation.
3. Mortgage Payments: Discuss the situation with your lender. They may provide temporary relief, such as suspending or reducing mortgage payments during the recovery process. This can vary by situation but is worth asking.
4. Document Everything: Keep records of all your communications with the insurance company, lender, and any other parties involved. Document the damage, any expenses you incur, and any agreements you make noting dates and specific staff contacts’ information for each company.
5. Rebuilding or Relocating: Depending on your circumstances, you might decide to rebuild on the same property or relocate elsewhere. This decision will impact how you handle your mortgage, insurance, and interim living arrangements.
6. Tax Implications: Consult a tax professional to understand the potential tax implications of your situation. There could be deductions or other considerations available to you related to the loss of your property.

Remember, every situation is unique, and relevant steps will depend on your specific circumstances, mortgage terms, insurance coverage, and local regulations. It’s important to communicate early with your lender, insurance company, and relevant authorities to navigate this challenging time.  If I can be of any assistance, please don’t hesitate to reach out, I wish everyone affected the very best.

Image Credit: Julie Blake Edison  on Unsplash

If you happen to be carrying extra debt from credit cards or other loans (such as car loans, personal loans, etc.) you may benefit from simplifying and reducing your overall monthly payments, especially given rising costs in the current economic climate.  Rolling extra debt into a mortgage could be a great solution.

Consolidating other forms of debt into your mortgage has multiple benefits. This process allows you to pay off your loans over a longer period with smaller payments per month, and often at a reduced rate of interest when compared to credit card interest for example.  Credit cards often have higher rates of interest than mortgage loans do.

Not only does debt consolidation help with clearing up high-interest debt, it also makes your debt more manageable keeping track of fewer payments.

While debt consolidation through refinancing will increase your mortgage amount, lowering your overall payments and management can be well worth it when it comes to cost savings, time, and stress.  Please note, you need at least 20 percent equity in your home to refinance.

If you are looking for a way to simplify (or get out of) debt, please don’t hesitate to reach out to ask.  I am happy to review your financial portfolio as it relates to reducing costs and improving cash flow, and any other mortgage information you might need.

Adapted from DLC Marketing

Image: Debby Hudson on Unsplash

A quick review with your insurance agent can ensure your strata’s insurance policy aligns with your individual unit’s insurance coverage.  This can safeguard you from a potentially overwhelming and unexpected financial expense you shouldn’t have to worry about.

Condominium or strata insurance covers the entire building including common areas such as hallways and elevators.  It covers damage to individual units as well if for example there’s a leak due to an issue with the building’s plumbing system.  In that case, though strata insurance should cover repairs to the suite, the suite’s owner is obligated to pay the strata’s deductible for the claim.

As such, condo unit owners’ individual insurance policies typically include coverage to pay the strata’s insurance deductible as well as protection for their unit’s contents if such an issue arises.

However, strata insurance deductible costs have risen dramatically over the last several years in Canada, and condo owners unaware of the changes may not be adequately covered.  Historically, deductibles in strata-managed buildings averaged $25,000. In the event of an accident such as a flood or fire, the owner would have needed to pay $25,000 to have their unit repaired.  Strata unit deductibles can now range to $100,000 or more; adequate coverage is crucial.

If you are a condo owner and you’d like to ensure your unit’s insurance policy includes enough coverage to cover the deductible of the strata’s insurance, review them both with your insurance agent.  The strata can provide you with a copy of its policy.  Individual policies’ terms may vary.  Please reach out if you need a referral to an experienced home insurance professional for an opinion on yours.

Adapted from DLC Marketing

Image: Bisakha Datta on Unsplash

One of the quickest ways to take control of your finances is to create a monthly budget.  Creating a snapshot of your income and spending can help you reach your financial goals sooner.

Step 1: Calculate Your Income

The first step to creating any budget is determining exactly how much money you have available per month after taxes.

Step 2: Track Your Spending

To start, list out your fixed expenses – these are things like car payments, loans, rent or mortgage costs that do not change monthly.  Don’t forget to prorate your annual expenses like car insurance if you only pay for it once per year.  Next, review your variable expenses, groceries, gas, entertainment for example, and determine how much you spend on average.  Then review each category and see where you might be able to cut back.

Step 3: Set Realistic Goals

Realistic goals are vital for long-lasting financial health.  If you’re not sure where to start, consider the 50/30/20 rule, which applies the following:

• 50% of your spending is for needs such as rent or mortgage payments, car payments, utilities and groceries
• 30% of your income is for wants such as shopping, vacations, streaming services, etc.
• 20% of your income goes to savings or debts such as emergency funds, retirement, child’s education and/or credit card payments

Step 4: Make a Plan

There are a few different ways you can set your monthly budget. For some, setting realistic spending limits for each category works well.  For others, looking at the importance of the items on their expenses list and re-prioritizing can free up funds.  Perhaps you can save money by getting a better interest rate on your mortgage or changing your payment schedule for your loan.  Be sure to connect with me before making any changes in that regard.

Step 5: Stay on Track

Tracking your budget monthly is important to catch any changes in your spending habits.  Conducting an annual review and considering any changes in expenses or wages requiring adjustments to your overall plan will help you adapt over time.

A realistic budget specific to your circumstances is key.  Please let me know if I can provide any further input, happy budgeting!

Adapted from DLC Marketing

Photo Credit: Timo Stern on Unsplash

June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.

Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June.

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress.

Bottom Line
It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.

Courtesy of Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Image: Frank Peters on Canva

The Bank of Canada increased the overnight policy rate by 25 basis points this morning to 5.0%, its highest level since March 2001. Never before has a policy action been so widely expected. Still, the Bank’s detailed outlook in the July Monetary Policy Report (MPR) suggests stronger growth and a longer trajectory to reach the 2% inflation target. The Bank of Canada believes the economy is still in excess demand and that growth will continue stronger than expected, supported by tight labour markets, the high level of accumulated household savings, and rapid population growth. “Newcomers to Canada are entering the labour force, easing the labour shortage. But at the same time, they add to consumer spending and demand for housing.”

The Bank forecasts GDP growth to average 1.0% through the middle of next year–a soft landing in the economy. “This means the economy moves into modest excess supply in early 2024, and this should relieve price pressures. CPI inflation is forecast to remain about 3% for the next year, before declining gradually to the 2% target in the middle of 2025.” This is about six months later than the Bank expected in April. This means that high-interest rates remain higher for longer.

While Canadian inflation has fallen quickly, much of the downward momentum has come from lower energy prices and base-year effects as large price increases last year fall out of the year-over-year inflation calculation. We are still seeing large price increases in a wide range of goods and services. Our measures of core inflation—which we use to gauge underlying inflationary pressures—have come down, but not as much as we expected.

There continue to be large price increases in a wide range of goods and services. Measures of core inflation have come down, but by less than expected (see chart below). One measure of core inflation–which removes food, energy and shelter prices, remains elevated and will likely continue to be sticky.

To remove base effects, the Bank looks at three-month rates of core inflation, which have remained at 3.5% to 4.0% since September 2022, almost a percentage point above the Bank’s expectations at the beginning of this year.

In addition, labour markets remain tight. Although the jobless rate has risen to 5.4%, that is still low by historical standards. The unemployment rate was at 5.7% when the pandemic began, which was considered close to full employment at the time. Job gains have been robust, with about 290,000 net new jobs created in the first six months of 2023. Many new entrants to the labour market have been hired quickly, and wage growth has been about 4% to 5%.

The faster-than-expected pickup in housing resales, combined with a lack of supply, has pushed house prices higher than anticipated by the Bank of Canada in January (see chart below). According to the MPR, “the previously unforeseen strength in house prices is likely to persist and boost inflation by as much as 0.3 percentage points by the end of 2023, compared with the January outlook.”

Bottom Line

As always, the next steps by the Bank of Canada will be data-dependent. Interest rates will remain higher for longer if the Bank is correct that inflation will not reach its 2% target until 2025. We also cannot rule out more rate hikes in the future. This morning, the US inflation data for June were released, showing a marked decline from 4% in May to 3% in June. Markets rallied worldwide, taking Canadian bond yields down despite the BoC tightening. The hardship caused by the continued rise in mortgage rates is already evident. OSFI recently announced the possibility of higher capital requirements for federally insured financial institutions on mortgages with loan-to-value ratios above 65% that have unusually high amortizations. This proposal is now out for consultation. It seems OSFI and the federal consumer watchdog are working at cross purposes.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca