It's a strategy that may run counter to what most empty nesters are doing. Still, it may have a place in the investment strategy of those looking to develop a sort of forced savings plan courtesy of real estate. Jemima Codrington reports.
Video transcript below:
Jemima Codrington: Most baby boomers that downsize ahead of retirement. But should they be upsizing instead? Hi, I’m Jemima Codrington and welcome to this week’s episode of Investor Insight of Crew TV.
A recent study shows that increasing number of Canadians are using their home as a retirement fund by buying a larger home thus increasing mortgage payments and forcing money into an asset and away from other spending temptations. So how exactly does the process work.
Paul Kandakos, President, Realty Hub
How does forced savings work?
Paul Kandakos: The idea for savings is a recent phenomenon here in Canada because our real estate market specifically the residential housing market has been doing so well and in some cases is returning single and double digit returns. So what’s happening is, you have families that rather than downsizing are upsizing their homes, because they believe that they can get the bigger home and what they are trying to do with that is two fold. They are trying to get forced savings and they are trying to get appreciation on their home. So what’s happening is their existing homes, they might have a bit of equity in the home, they take that equity, they try to parlay it, put it into a bigger home.
And by buying the bigger home, they are trying to use that leverage to get better appreciation on their home because they are seeing that the past 10 years, historically our markets have been doing well, so they are trying to get the bigger home to get better appreciation and at the same time because they are paying down the mortgage, they are getting forced savings on their mortgage. So a lot of people see it as a way to benefit in 2 ways, which is create appreciation because they are buying a bigger home and also they are forced to save more money because their mortgage is bigger.
Jemima Codrington: Financial experts [ invoked] some mixed commentary about the strategy. So what are some of the pitfalls?
What are some of the pitfalls of forced savings?
Paul Kandakos: Some flaws or issues with this investment strategy is that it can be a perilous strategy because if you look at the late 80s, we had that housing crash, it can wipe out a lot of equities. So if you are upsizing your home, taking on a bigger mortgage, your house can depreciate significantly.
At least you are at risk of your house potentially decreasing significantly. The equity in your home increasing significantly if we have a significant housing correction which is not the question. I personally believe, I think the housing market here in Canada will start plateauing, you might see a bit of a pull off about 5%. So that’s the risk you run if you try to leverage your money and move into a bigger mortgage.