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| Adrian Mastracci, a fee-only advisor at KCM Wealth Management Inc., advises retirees against taking on new debt. |
By Gigi Suhanic
National Post
FP Money
Saturday, December 20, 2003
Question: I am about to retire with a pension of $40,000. I would like to purchase a condo in Florida for $85,000. Would you be able to suggest which of these three methods are most practical:
1. Since my house is paid up with a value of $250,000, should I take a reverse mortgage?
2. Should I take a line of credit on the house and pay back the interest each month?
3. Should I redeem $85,000 in RRSPs?
Do you have a better idea?
Answer: Adrian Mastracci, an investment advisor at KCM Wealth Management in Vancouver, thinks all three of your options are expensive.
For example, the interest alone on an $85,000 loan - and he's assuming this figure is in Canadian funds - would be $4,250. "If you're not going to live there full time and it's rented it may be easier to go out and borrow the money," Mr. Mastracci says.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “All three of your options are expensive. It’s better to avoid debt when you’re on the verge of retiring because it curtails your flexibility.”
But if the condo ends up being empty, you need to ask yourself if you have enough income to cover all the condo expenses such as property taxes, insurance and repairs. "Once you cross the border you’re subject to the extra complication of the Canada-U.S. tax treaty and estate taxes that may apply in the U.S. when you die."
Mr. Mastracci says it’s better to avoid debt when you’re on the verge of retiring because it curtails your flexibility.
If you want still want to proceed with your purchase, Tom Merianos, an investment representative and a certified financial planner, has some suggestions about your three options.
First, Mr. Merianos thinks the reverse mortgage method is a last ditch alternative. Reverse mortgages allow homeowners to borrow against the equity in their home and receive a regular monthly tax-free payment or lump sum. Repayment of the principal and the accrued interest is required when a surviving spouse dies or when the house is sold.
Mr. Merianos is cool to this option because it reduces "the equity in what is often an individual's largest and most precious asset – their home." He also says there are setup fees involved in a reverse mortgage and added costs if you decide to pay it back before you sell your house.
"When somebody is in an actual financial need, the benefits may outweigh the disadvantages of a reverse mortgage. In your case, you have another appropriate solution," he says.
The line of credit option is a more promising avenue in terms of flexible repayment schedule, Mr. Merianos says. The bank will likely give you a better interest rate because you'll be putting the house up as collateral against the loan.
Also, Mr. Merianos points out if you decide to rent the U.S. property, you can deduct the interest on your line of credit against the rental income.
As for redeeming $85,000 in RRSPs, that would prove a "huge" tax hit. In case your $40,000 pension doesn't cover your expenses and the line of credit payments, you can always withdraw smaller portions of your RRSP over time.
But Mr. Merianos cautions you to measure them out keeping in mind the Old Age Security (OAS) clawback, which kicks in when annual income reaches more than $57,879.
At that point you have to repay 15% of the amount by which your net income (including OAS) exceeds $57,879.
"The longer you can keep your investments inside your RRSP the longer you'll have your money tax sheltered. That's why we're using RRSP only as an option to pay down the line of credit if you doesn't have enough money," Mr. Merianos says.
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