Real estate as nest egg

Retired Ottawa high school teacher Gerald Jean is about to hit the town. He and his wife are off to see Morgan Freeman and Matt Damon in Invictus for $4 each.

"Yeah, that's pretty cheap. There are two little cinemas and nothing to write home to mother about, but I don't argue with the price," said Mr. Jean, who seven years ago packed his bags with his wife and retired to Elliott Lake, Ont., a retirement community about six hours northwest of Toronto by car.

The attraction was a house that was about a third of the cost of his home in the Ottawa area. "A $300,000 house in Ottawa wouldn't even be $100,000 here," says the 60-year-old. The difference in cost is pure savings for the couple.

You won't find the same choices in cinemas, restaurants or shopping as there are in big cities, but small-town Canada is increasingly billing itself as a place where Canadian retirees can make the savings from their big-city homes go much further.

The net worth of Canadians is increasingly being tied up in their homes. Close to 39% of Canadian wealth is now tied up in home ownership. Just 20 years ago it was more like 16%. A home has become part of most retirement plans.

How do you get your money out of your home? It's not like you can sell it brick by brick. You could potentially rent part of it for income, but most seniors don't want a stranger living in their midst.

Another increasingly popular option has been a reverse mortgage, a loan repaid with the interest and principal from the equity you have built in your home.

Then there's Mr. Jean's option. Move away from the big city to the pace of small town life.

"In our case, my daughter had moved up here first," says Mr. Jean. "I grew up in a small town so it wasn't foreign land. But it was a savings, it's a lot cheaper here than it was Ottawa. It makes you able to get a lot more out of your retirement. When I was in Ottawa, I burned a tank of gas a week. It's three minutes to get everywhere here."

Elliott Lake Mayor Rick Hamilton says about half of his town of 12,000 are retirees. "We are getting people from the greater Toronto area, Ottawa. You name it."

He thinks the future of small towns, which in many cases have lost their manufacturing base, (in Elliott Lake it was the mining industry) might be in attracting retirees.

"We have something here that a metropolis doesn't have, and that's peace and quiet. But we also have affordability. Your pension dollar is going to go a lot further than living in downtown Toronto," says Mr. Hamilton.

Canadians have had a long tradition of using the equity in their home as their nest egg, says Steve Ranson, chief executive of HomeQ Corp., which has the largest portfolio of reverse mortgages in Canada, operating under the CHIP Home Income Plan.

Mr. Ranson's company offers retirees the chance to stay in their homes by giving them a lump sum of cash from their homes through a reverse mortgage. The homeowner can never be forced to leave, but the principal withdrawal and interest payments mean much of the equity in your home could be gone by the time you die, leaving little for heirs.


"The problem is a house is pretty illiquid," says Mr. Ranson. "We help people turn their home into cash flow upfront or over a period of time, however they want it."

The reverse mortgage market is growing. HomeQ reported that the value of reverse mortgage originations was up 77% in the fourth quarter from a year ago. But with a market worth $1-billion, it is still less than 1% of the overall mortgage market.

"I think a reverse mortgage is appealing to a lot of people, but the same onerous interest charged on a mortgage builds up as a liability," says author and former cabinet minister Garth Turner. "If you are planning on leaving a piece of property as part of an estate, a reverse mortgage can absolutely destroy the amount of wealth in that property. It's a wealth crusher."

But for some, there are few other options. Mr. Turner says Canadians in large cities are increasingly being forced to downsize to get the equity out of their homes. That type of move can come with transaction costs as high as 6% of the value of your home.

Mr. Turner says a home equity line of credit is another option for Canadians. If you had, say, a $400,000 home, you could easily get half that amount in credit and use the cash to create an investment portfolio.

"The interest on the loan is tax deductible," says Mr. Turner.

Retirees may continue to look to small towns like Elliott Lake or downsize into condominiums, but either way he thinks Canadians need to be wary of having so much invested in their homes.

"The bulk of our net worth is now in real estate," says Mr. Turner, who believes the housing market is headed for a fall. "If you are sitting on $800,000 of equity in your home, that's crazy. Get out of there."

(prepared by Garry Marr/Financial Post/National Post)