Should You Buy A Home Before or After Retirement?
Should You Buy A Home Before or After Retirement?
When retirement nears, people start thinking about what to do about houses.
Renting may have worked for you earlier but with rent increases and when no long-term lease seems to guarantee some sort of rent control, it may sound like your expenses will outweigh your retirement income.
So what should retired individuals do when it comes to homeownership? It's a key part of retirement planning and something you should talk to a financial advisor about but here are a few things worth noting when it comes to buying a house and when you should do it.
Before we begin, do keep in mind that the housing market is complicated and that housing prices can vary greatly. So plan ahead and be aware of what real estate prices in your area look like.
What will your mortgage look like?
Unless you have saved up enough to pay for a home outright, you will need the help of mortgage lenders to finance the purchase of a house.
If you are planning on selling your home, your current home that is, to buy a new house then you may have sufficient assets to not worry about a mortgage - especially if you're downsizing.
Otherwise, you need to factor in your mortgage payments against your monthly income during your retirement.
A mortgage broker can help you find the best type of mortgage based on your specific situation. Mortgage brokers factor in a whole flew of factors like interest rates, property taxes, capital gains tax, and the possible equity you can get from a new house.
If you cannot buy a home outright, then you still have the option of qualifying for a traditional mortgage as long as you have a good credit score, by making a habit of paying back your loans on time and keeping a good debt-to-income ratio.
What you need to prove to the lender is that you have a good enough cash flow to pay back the mortgage interest, principal, and taxes.
In your retirement years, you may face unexpected costs linked to healthcare and other issues but there is something you can do about that.
What is a reverse mortgage?
Canadian homeowners over the age of 55 can qualify for a reverse mortgage that allows them to borrow against the value of their home. This reverse mortgage can be used to do things like cover unexpected costs and help put you back on your feet. It's not meant as a luxury fund.
However, to use it, you need to have built some equity in your home - meaning that you have paid down your mortgage or currently own your home outright.
This is one of the reasons why buying a home before retirement, and thus building equity in it, is a good idea.
Will you still have a job once you retire?
While many people retire as soon as they can, a substantial amount keep working.
Many retired people keep working because they enjoy the social aspects of their job or they need the retirement income that it provides.
It's great to find ways to stay busy without feeling too stressed, which is important during your most vulnerable years. As to how this affects whether or not you should buy a home before retiring or wait then it again becomes a question of money.
If your income stays steady or increases during your retirement it means you can take on higher costs associated with buying a house.
Here is some more information about working while retired and what that means for your pension. (In general, it's a good thing.)
Some people will opt for a more peaceful retirement and in that scenario, you need to take stock of your investments to see what kind of money you will be dealing with during your retirement. Maintenance costs and other expenses can quickly add up for a new house.
The family home may not seem that appealing once retirement hits, either because a family member moved out or high property taxes, but it may be easier to deal with it than risk a purchase that turns into a money pit.
Having a job post-retirement gives you more flexibility. As such, if you do count on continuing work, it makes sense to hold off a little longer to pay for the best possible house.
Do keep in mind how viable it is for you to keep that level of income. You do get benefits to your eventual full pension for working during your retirement but they may not be enough to cover all your expenses.
Can you live comfortably in the same place for the rest of your life?
This has less to do with the money and more to do with the reality of aging bodies. Stairs become a pain on the knees, narrow spaces can be clunkier to navigate, and so on.
Before looking at your savings and your investments, look at how easy it will be to use your home with reduced mobility.
Most older Canadians want to live at home, and not in a retirement home, for a variety of reasons. But what you should consider if you're thinking about when to buy a home is whether the home you will be purchasing will make living easier.
A new, flatter, home with fewer bedrooms that's easier to take care of can be a huge benefit for you daily. Reducing the risk of injury alone can be worth the price. The question again is whether you should invest in that new home before or after retirement.
A home that's easier to take care of usually means smaller one. A factor that matters a lot, cost, is then something you can almost eliminate; you can downsize and use the proceeds of the home sale to finance both the purchase of a smaller home and other things that will enhance your quality of life.
If you plan on being out and about during your retirement and experiencing things that you didn't have time for, then moving into a new house that's more adapted to your interests rather than your job or the proximity to schools can be a huge boon.
Do keep in mind that a home with a lower appraised value means less home equity to borrow against should an emergency arise.
The bottom line.
Ask yourself what you want your life to look like in your retirement and steer your ship in that direction as early as possible.
If you are satisfied with your current home now, try to think of factors like how easily you can keep up with the maintenance costs of the property or whether you can move in it comfortably.
Plan things out ahead by looking at the home equity you can generate before retirement, if you want to keep working during your retirement, and whether your home will still be adapted to your lifestyle during your retirement.
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