by Alisa Aragon-Lloyd, as seen in “New Condo + Condo Guide”
Most people believe that being mortgage-free is their plan for retirement. That means paying off your mortgage as fast as possible becomes the priority and having other forms of investments are considered only after your property is paid off.
It is important to decide what option will give you the balanced diversification and protect you from the real estate market and economic fluctuations.
One strategy is to be mortgage- free, so you will have minimal property expenses when you retire and have 100 per cent of the value of your home in equity. You will then have extra funds when you decide to down-size to a smaller home. But by putting all of your eggs in one basket, you could be limiting the ability to use other investment options that could give you a higher return on investment and would help you achieve your retirement goals faster.
By focusing on making extra payments towards your mortgage, making lump sum payments on your mortgage, or increasing your payments regularly, you would shorten the life of your mortgage, yet you are not investing into your RRSPs.
Here is the best of both worlds: By investing in your RRSPs, you pay less taxes, get a refund, and with that money you could make a lump sum payment on your mortgage every year.
Another option would be to put the equity in your home to work for you by using a HELOC (a home equity line of credit). This will give you access to your equity whenever you need it and would be a perfect investment vehicle.
Having a HELOC separate from your actual mortgage, gives you the flexibility to use it for investment purposes, therefore, the interest you pay on funds that are drawn from the home equity line of credit are tax-deductible.
Here are some investment ideas: Use the funds from the HELOC to purchase an investment property, and with the rental income you could cover the mortgage payments and property costs. The rental property would then pay for itself and you have a vehicle to help with your retirement goal.
Another idea is doing the “Smith Manoeuvre”. This means using the HELOC for short and long term investments. You do short-term, high-return investments, that when cashed, help you pay off the line of credit. Any extra money you have made, will allow you to make a lump sum payment on your original mortgage.
It is important to have a retirement strategy that works for you by exploring different ways that work with your lifestyle and goals. A comprehensive strategy can be put in place by working with your Mortgage Expert, Financial Adviser and Accountant.