Client is 55, single, and behind on retirement savings. A case-study in pre-retirement mortgage planning.

I have a client - let's call him Ted - who recently reached out to me to do some mortgage planning.

Ted is in his mid-50s, single, and recently relocated to a different city for employment, leaving his current home in Edmonton in the care of a property management firm, and now renting himself in the new city. His Edmonton mortgage was on track to be paid off within about 10 years when he lost his job in early 2020. The layoff threw his plans into disarray and chewed deeply into the little retirement savings he had.

Ted’s life has now re-stabilized and he is enjoying his new job and the new city well enough to consider purchasing a home there. One of his first questions was whether he could own a second home and keep Edmonton as a rental at the same time, and if he could, how to extract equity for down payment for the new purchase, and would all the qualifying numbers work out?

The short answer is yes, he could own a second property, but the reason for this blog is more so to illustrate how I saw his situation and the recommendations I made on how to structure the mortgages to better prepare him financially for retirement and to keep his options open.  As we all know, life throws us curve-balls.

First of all when Ted called, I saw him as vulnerable not only to job/income loss, but also to not having a lot of money/savings to fall back on for retirement. Even if he did manage to become mortgage-free in the next 10 years, I suspected that he would have very little in the way of pension, CPP or OAS to live on, and all his equity would be locked away in his house. I constantly say to people -  think it through, how does this all play out, in this case retirement? Ted could not answer that question on how his retirement could actually manifest.

Being a landlord myself, I proposed to Ted to keep his Edmonton property as part of his retirement plan. 

1. Keep the property as an investment for retirement - it will go up in value as the mortgage goes down over time and there will be something left over to help fund your retirement..
2. Refinance today to 80% of the appraised value and discharge the existing mortgage. The residual cash (called Equity Take Out) would be used as down payment for another home for him to owner-occupy in his new city.
3. Reset the amortization (currently at 10) back to 25-30 years to minimize the monthly payment obligation and maximize cash-flow. Cash flow is the difference between the rent he receives and his property expenses including mortgage, property taxes, and fire insurance. 
   • The spare cash flow would be used to pay down the mortgage faster on his new purchase in the new city instead.
   • His accountant might be comfortable deducting the mortgage interest expense from the rental revenue on his personal tax returns, making it tax-deductible. 
   • Interest expense on one’s owner-occupied property is definitely not tax-deductible therefore this is the mortgage you want to pay down more quickly using your mortgage’s prepayment privileges and any spare cash. 

For his new city purchase, here was my advice for Ted.

1. Look for and buy a property with a legal rental / accessory suite. 
• You are single and don’t need much space
• The accessory suite rental revenue (along with the spare cash-flow from Edmonton) can be used to pay down your new mortgage extremely quickly (become mortgage free faster as was your original plan before job-loss)
• When you retire (it’s now an option!), you could occupy the accessory suite and travel, and rent out the main part of the house as a bigger income source instead - create your own pension!
• If you become mortgage-free while you are still working, direct your spare income to becoming mortgage-free on the Edmonton revenue property as well. Cash flow from Edmonton becomes part 2 of your retirement plan income stream.
2. Acquire purchase financing and set the amortization schedule back to 25-30 years to minimize the required monthly payment.
• Note that I emphasized ‘required’ monthly payment. He can always pay more with lump sums without being obligated to pay. Ted already got stung once with job loss. He now understands that it is not how much you pay in a month towards your mortgage balance per se, but what you pay in a year. The more you pay, the faster it goes away! Simple. So my advice is accumulate extra cash in a separate account. If life is stable, dump it against your mortgage every few months. 
3. Retain future access to your equity in the event of job loss. Consider a re-advanceable mortgage on the new city mortgage and perhaps the Edmonton property as well
• One of the disadvantages of a standard mortgage (IMO) is that your equity becomes trapped (inaccessible) as you pay down your mortgage. 
• With a re-advanceable mortgage, the principal that you pay down adds back (re-advances) to your HELOC as an increase in your credit limit, thereby always being available to you. (This is a great product for those not tempted with debt-financed consumer spending, and dangerous if you can’t resist the temptation!)
• The re-advanceable mortgage can stay as a HELOC on your property even after your mortgage component is paid off completely and - with certain lenders - even after you have retired, which is an important financing option.

So let’s summarize. 

• The new structure is set up to have minimum required payments against the mortgages which is important for preserving cash flow in the event of job loss (you just make the minimum payments), but use the lump-sum feature to make extra payments.
• Direct all surplus cash flow to paying off the mortgage on the new city owner-occupied property, because that interest (on the owner-occupied suite) cannot be a tax deduction. The basement suite should generate sufficient rent to cover property taxes, operating costs and utilities. So cash-flow should be strong.
• The Edmonton rental is more or less cash flow neutral, but the property is appreciating in value over time while the mortgage is decreasing. In time, the mortgage will be paid off and the rental property will produce a 2nd monthly revenue stream. The tenants pay utilities. In time, there will be a decent chunk of equity when Ted eventually sells.
• To accelerate his retirement, Ted could occupy the basement suite in his new place and earn even more rent from the main suite. 
• At 65 he will have OAS, CPP, rental income from new city and rental income from Edmonton, and now has a serious chance at being mortgage-free on both properties and retirement is actually doable if he keeps his spending modest.
• He has retained access to his home-equity (even after retirement) via a re-advanceable mortgage. In time or in case of emergency, he could also draw down on some of his home equity to fund expenses while still living in the home. In some respects, this is similar to a reverse mortgage or what some call an equity-release-program.
• Most importantly, Ted now has options and a viable path to retirement.
  
  

I choose the image on this blog to visualize Ted in another 10 years, at 65 where retirement is possible because of smart decisions made today.  What are you waiting for? "One day" is coming fast!

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