COLUMN Deborah Carlyon
Although 2.5 million people are investing for retirement via KiwiSaver, balances are small and with 59% of households living in owner occupied dwellings, Statistics NZ points out the house we live in is our biggest asset. Australia and the United Kingdom are similar even though, unlike New Zealand, both countries have compulsory superannuation and well-developed private pension markets.
The growth in property values is hard to ignore and the reward for renovating a home is significant. Low interest rates make it cost effective to dip into higher home equity to add a bathroom, a deck, garage, extend a living room or add an entire new floor in the roof space or basement. It’s a win-win situation. Growing families benefit from a spacious well insulated home and the renovation pays for itself quickly in a rising housing market. The flipside is bigger mortgage repayments eat into the household budget and longer loan terms cramp the ability to save for retirement. Some retirees still have mortgages.
So is it any surprise there is a growing reliance on the home as a key part of a retirement strategy? It can be as simple as deciding to sell and downsize. But moving from a suburban family home to a townhouse or city apartment may not result in releasing much capital. These days living in the city close to cultural amenities, parks and transport routes is top of the list for many retirees. Competition drives up prices and to release significant capital you may need to relocate to a smaller town.
Not everyone wants to uproot at retirement – there’s enough upheaval leaving the routine and stimulation of the workplace. It pays to think outside the box and there are definitely other ways to tap into home equity.
You can stay in the family home and earn by letting part of the house permanently or for short term accommodation. You’ll need planning permission to create a separate dwelling for tenants – potentially easier in Auckland under the latest Unitary plan – and an income stream will add value to your property. Rental income is taxable but you offset a portion of costs such as mortgage, rates, insurance and maintenance.
Renting out rooms in your home to flat mates, boarders or foreign students is the simplest solution and not taxable if you apply the standard cost method and charge no more than $257 per week for each boarder, up to two at a time. If you don’t always want someone in the house though, running a bed and breakfast or Airbnb allows you to pick and choose. However, flexibility comes with more work - operating a website, dealing with inquiries and visitor movements, keeping cost records and paying tax.
Having strangers to stay to generate revenue is not for everyone. If you’re not ready to move when you retire but need to access money for medical care, house maintenance or that dream round the world trip, you can borrow again. It could be a simple line of credit from your bank on a revolving credit facility. Or, for anyone over 65, some banks and insurance companies offer specific Home Equity Loans or Reverse Annuity Mortgages. There are rules around how much you can borrow depending on the value of your debt free home and your age. With no need for repayments the interest will definitely grow the debt, but you benefit also from house price increases. The key advantage to look for is a promise that no matter how long you live, you will never owe more than the value of your house when it is sold.
With healthcare improvements, retirement can last 30 years and we see definite phases with different spending needs. The first energetic decade is for travel, sporting and leisure pursuits, with a slower reflective stage from age 75. Many run down the retirement fund in those active years and then in their eighties, move into a retirement village. At that point you are actually trading home ownership for a licence to occupy a townhouse or apartment in a village. You live in a comfortable new property with fixed overheads, including all house and garden maintenance. In return you forsake an agreed amount of the purchase cost, often up to 25%.
In effect, you are tapping into home equity twice by moving to a retirement village – first when you sell the family home and again when you die. Yes, your children will inherit less, but most retirees in their eighties value the ability to live independently with the security of onsite help if they ever need it.
For more by Deborah Carlyon, read The A to Z to financial knowledge.
Deborah Carlyon is an Authorised Financial Adviser. This column does not provide personalised advice. Her Disclosure Statement is available on request and free of charge by emailing [email protected]
This column by Deborah Carlyon featured on page 26 in Issue 020 of Renovate Magazine. Renovate Magazine is an easy to use resource providing fresh inspiration and motivation at every turn of the page.
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*All information is believed to be true at time of publishing and is subject to change.
Deborah is a Certified Financial Planner (CFPCM), a member of the Institute of Financial Advisers (IFA) and an Authorised Financial Adviser (AFA). She is a principal of independent advisory company Stuart + Carlyon. This column does not provide personalised advice. Deborah’s Disclosure Statement is available on request and free of charge by emailing [email protected].