Keeping up the dream home

When Keith and Janet Carlaw (not their real names) married three years ago and bought a house on the lake, they felt that life was finally falling into place for them. Keith, 64, and Janet, 65, shared similar backgrounds and values: both had worked hard at jobs and raising their children. Also, both had been alone for years after dealing with the disappointment of failed marriages. When they met each other, each was more than ready to enjoy a quiet life with someone special.

A stay-at-home mom for the 25 years of her first marriage, Janet went back to work as an occupational therapist when that marriage ended. With financial help from her ex-husband, she had scraped together the money for a down payment on a small house. “It was important to me that my youngest son, who was still living at home at the time, had a place he could feel was his home base,” says Janet. “To this day, I don’t know if it was the right decision financially but, emotionally, it felt right.”

When he first met Janet, Keith had retired from his job at a car manufacturing company after 30 years and was working part-time in construction. Living in a modest home, he travelled occasionally, contributed an RRSP and continued to make support payments to his ex-wife.

Soon after meeting through mutual friends, Keith and Janet realized they had the same priorities: both valued their grown children (seven between them) and grandchildren (who also number seven), and both longed to settle in a home by the water. “We’d always wanted to live by the lake,” says Janet. “We started looking for a house immediately after getting married.”

Finding the dream home
Buying their dream house took all of the couple’s combined savings, including all the assets Keith had accumulated in his RRSP and the proceeds from the sale of Janet’s house. Each contributed an equal share of $50,000, and they were left with a $90,000 mortgage. By living within their means, they believed, they could handle the mortgage payment – even on their limited income.

Two years ago, Janet was forced to give up her job as a therapist because of arthritis in her knee. After knee replacement surgery, she began receiving a small pension from her employer. Even with Janet’s pension and Keith’s part-time job, after he makes support payments to his ex-wife – he’s obliged to continue paying unless she remarries – and they pay other regular bills, there’s little left over at the end of the month – so little, in fact, they’re even finding it difficult to keep up with the minor renovations and repairs needed in their older home. The couple also wish they could help their children when they need it. But they hope their house will one day provide a small inheritance. “Our thought is that, while we can’t financially help out our children now, we have this house and when we aren’t here anymore, we’ll be able to leave a little something to all of the kids,” says Janet.

Next page: Worries, and expert advice

Janet hasn’t returned to work since the operation; the amount she’d earn may not match the costs that go with having a job. “Besides, I like being here for Keith when he gets home,” she says. “His job is hard physical labour and at his age, I think it’s important to have a hot meal waiting for him at night.” So they live day to day. Problem is, as they’ve learned the hard way, unexpected expenses can be disastrous. “Last year, we had an income tax bill of about $7,000,” says Keith. “I wasn’t having tax taken off at the job I had then, and Janet’s CPP cheques didn’t have enough income tax coming off them, so we really got hit hard.” They paid the tax bill using a line of credit. Now, they make minimal payments on it every month.

Don’t dwell on worries
But they try not to dwell on their financial worries. “We try not to think about what we would do if Keith had to stop working,” explains Janet. “I suppose we would just have to sell our house.” Luckily, they’re covered by a health insurance plan from Keith’s former employer. “It would be nice if we had a bit of money to do the small things that need to be done to our house,” says Janet. There’s nothing more enjoyable, she adds, than coming home to sit in the yard and watch the lake.

“We’re very low-maintenance people. It really doesn’t take a lot to make us happy,” says Keith. “But having a bit of breathing space every month would make a world of difference.”

What the advisers say
With and Janet Carlaw are keenly aware of the issue at the centre of their financial insecurity: it’s the large amount of debt they’re carrying, mostly as a result of their house purchase. Compounding this anxiety is the fact that their regular income, which is already somewhat stretched, is about to be reduced.

At age 65, Janet is retired. “Keith is 64 years old, and [his work in construction] is hard labour. He may have to slow down or stop completely in the next little while,” says Jamie Golombek, vice-president, taxation and estate planning at AIM Trimark Investments in Toronto. That means $18,000 less income annually and, even with Keith’s OAS benefits kicking in at age 65, they’ll be down about $13,000 in annual income once Keith stops working.

Janet and Keith live within their means and without an extravagant lifestyle. Golombek says whether they can afford to keep their house depends entirely on whether they can reduce their debt load.

Reduce debt
Because they’re heading into retirement, it’s even more important to reduce their total debt of $120,000, says Golombek. “The first thing I advise is to consolidate everything into a line of credit,” he says. The interest rate on a line of credit, especially when it’s secured by a home, can be significantly lower than the rate charged on credit card balances, and that means paying off debt faster. Also, paying more than the required minimum on their loans is crucial to shrinking the onerous debt. (The only possible “good loan” is a car loan, says Golombek, because it may carry a rate lower than even the line of credit, thanks to good financing deals available through the sellers.)

Carol Funnell, a financial planner with Cartier Partners in Winnipeg, agrees that a line of credit secured by their home is the way to go. “Your home is a substantial asset, and it’s there when you need it. [Certain] lines of credit would allow them to access as much as 75 per cent of the appraised value of their home as they continue to pay it back or not pay it back until the sale of the property,” she says. Unlike a home equity loan, they’re not obliged to make fixed payments; nor are there any limitations based on age, sex or marital status as there may be with a reverse mortgage, adds Funnell.

Next page: Don’t forget insurance

Don’t forget to insure
Insurance should be another concern for the Carlaws, according to Funnell. Even if they choose to bump Keith’s small insurance coverage from his employer to $43,700 when he turns 65, the Carlaws are underinsured, she says. To establish an estate for both and to cover any outstanding debt if either dies prematurely, Funnell recommends a Term 10 policy in the amount of $250,000, which she says can be purchased at reasonable cost. “Upon the first death, this would give either Janet or Keith an estate of $250,000.” The benefit may also create an inheritance for the children, she adds.

Once they’ve freed up more cash and before the 10-year term is up, the Carlaws should convert this insurance to permanent coverage, advises Funnell. However, she stresses that Keith’s current insurance coverage shouldn’t be changed or cancelled until he’s approved for the new coverage.

With two cars costing $6,400 annually, giving up one car would free up some cash. But the Carlaws are already living within their means and this, he stresses, would be a lifestyle decision.

Above all, the key to keeping their beloved house is doing all they can to pay off debt as quickly as possible. Says Golombek, “There’s no point saving until the debt is gone.”

Married or common-law partners who are together (not separated or divorced) who are both at least 60 years of age and who receive CPP retirement pensions can share their pension benefits on the portion of the benefit earned during their time together. This may result in tax savings. The overall benefits paid do not increase or decrease with pension sharing. Source: Human Resources Development Canada

There are three types of CPP Survivor Benefits: the death benefit is a one-time payment to or on behalf of the estate of a deceased Canada Pension Plan contributor. If there is no estate, the person responsible for the funeral expenses, the surviving spouse or common-law partner or the next of kin may be eligible, in that order; the survivor’s benefit is a monthly benefit paid to the surviving spouse or common-law partner of a deceased contributor. The children’s benefit is a monthly benefit for dependent children of a deceased contributor, paid to the natural or adopted child of the deceased contributor or a child in the care and control of the deceased contributor at the time of death. The child must be either under age 18 or between the ages of 18 and 25 and in full-time attendance at a school or university.           Source: Human Resources Development Canada