Reverse Mortgage Loan Blog

TO RENT OR OWN? THE PERENNIAL DEBATE

Q: I would appreciate your advice about my dilemma. I am 64 years old and am employed full time earning $40,000 per year. I probably (or, rather, hopefully) will be able to work another two years, but life can be unpredictable. I have just sold my townhouse and after paying off my line of credit and all my credit-card debts, I should have $250,000 left. The question is should I buy an apartment (going for around $250,000 for a two-bedroom, $220,0000 for a one-bedroom) or should I rent ($1,000 per month) invest the money and wait for a drop in prices. If I buy, should I get a mortgage. Downsizing from a large townhouse is very stressful, so your help is greatly appreciated. Susan in Calgary

A: In this fact situation, we really do not have sufficient information to make specific financial recommendations. (I’d need detailed information about your investments, savings and personal financial goals to do that.) However, I can make a couple of general observations and a “process” recommendation. Hopefully, these well help.

First of all, if you choose to purchase an apartment (or any kind of home), pay careful attention to your other sources of income, if any, to ensure that you have sufficient income to support yourself after the home purchase.

If you do not have sufficient income, then you are putting yourself in the position of having to find part-time work, or having to access capital in your home to supplement whatever income you do have. Accessing this capital could come in the form of an initial mortgage, if you qualify, or a reverse mortgage at some future point in time. A mortgage at current rates may be attractive relative to the internal borrowing costs built into a reverse mortgage.

Alternatively, if you choose to rent, you have the challenge of how to invest your remaining capital of $250,000. Given the mention of previous credit-card debt, I leap to the (perhaps dubious) conclusion that your financial acumen is not high. If I am correct — and forgive me if I am wrong — there may be a significant risk that you will make a poor decision on how to invest the funds. In the worst-case scenario, this could result in a rapid depletion of capital due to the forced withdrawal of funds during a negative investment environment.

So, how do you go about answering your question? I recommend you start by retaining the services of a fee-only financial planner, who charges by the hour. The planner will gather additional information as required, explore areas of planning need that may not have been expressed, such as estate planning, and prepare alternative strategies, exploring the advantages and disadvantages of each strategy. You can expect to pay in the range of $200 to $300 per hour for this service.

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