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The Downsizing Myth

Many people climb the real estate ladder with the intent of one day selling and using the proceeds to fund their retirement.

Most of us start out renting, move around, maybe own a condo or townhouse, and then move to a family home and then again to something further up the ladder. This has been the dream of many for home ownership.

Later in life, it is often in the financial plans to sell the larger family home, put some money from the equity into savings, and move to something smaller that is easier to manage and allows for aging in place. This is called ‘the Downsize’.

The problem is that the vision of what ‘the Downsize’ will look like and the reality of real options are very different. This difference turns the ‘the Downsize’ into a myth. I have had the misfortune of dispelling this myth to many families.

The Options

As people plan for their retirement years, they often look for home features that allow them to age in place and remain in their independent home for as long as possible. These features include single level homes with limited stairs and locations close to amenities and family.

Most people I have spoken to had expected their own downsize to be a move from their current larger family home, usually a 2 storey home in Calgary, to a smaller single level family home. A single level detached home in Calgary is called a bungalow.

A second option is a villa townhouse. This is an attached townhouse style design that usually offers a single level design and is usually structured as a condo corporation with bylaws, services such as landscaping and associated monthly condo fees.

The third option is an apartment also structured as a condo corporation.

When we price out the potential costs of these options, most people are shocked at both the purchase prices and the associated condo fees. The bungalow option and even the villa option has many times priced out as more expensive than their current home resale value and it sends people into a tailspin.

Families are left with the decision of making compromises they didn’t expect. Usually, next is a call to a financial advisor, family and some time to deliberate next steps.

Stay in the Current Home

Many families have opted to just remain in their current homes. This has often resulted in some renovations, hiring of service companies to assist with maintenance/landscaping and readjusting retirement plans. It is the ‘do nothing because we don’t know what else to do’ solution. It works until it doesn’t due to a fall, illness, other family needs or financial issues.

The Bungalow Option

Bungalow numbers are declining. The supply and demand challenges here going forward are going to be even tougher than they are today.

Older existing single level homes are regularly taken down in Calgary and replaced with multi-level semi-attached duplexes and recently quadplexes especially in inner city communities. These older single level homes usually need modernizing and it is more profitable to tear down and rebuild more dense home options. New zoning will most likely see these homes torn down and replaced with denser multi family options even quicker as years progress.

Take a drive around Bowness, Marda Loop, Dalhousie or any communities in the initial suburban ring around the city and see for yourself.

There are fewer new construction bungalows being built in newer neighbourhoods. Compare the number of bungalows in a community like Scenic Acres built in the 1980’s compared to Nolan Hill, built just recently.

I wish I could provide detailed data to show you the number of single level homes available over time but neither the City of Calgary nor the Province of Alberta provides this information. The available information only focuses on single family vs multi family statistics. If you find a source of this information please do let me know. The best way to see if just to look at homes for sale on realtor.ca. It is striking.

According to the Alberta Regional Dashboard , 40.3% of homes in Calgary were single family houses in 2021. The percentage of single family homes in Calgary greatly declined -28.6% in the last five years.

This statistic is for all single family homes, not just a single level bungalow style.

The Single level Villa Townhouse Option

Just like the demise of the construction of single level homes there are few single level villas/townhomes or semi-detached properties built in Calgary these days except for the luxury market. If you have over $1Million to spend on your ‘downsized’ townhouse villa there are options, but many homeowners are not considering spending 7 figures on a downsized property that meets their needs.

There are existing villas in more mature neighbourhoods, but past clients found the pricing higher and homes older than they expected. It made the prospect of selling their current home less attractive. The layered challenge was for clients that owned pets, especially dogs. Many complexes outright ban dogs on property while others allow only those under a 20 or 30 pound weight limit.

If the decision to move was about lifestyle, then families do have numerous luxury options. However, if ‘the Downsize’ is a financially driven decision, then the options are challenging.

The Apartment Option

In my experience, people looking to downsize were either ready and looking to move into an apartment or absolutely not there yet. It is a lifestyle decision as well as a financial one.

For those ready to make the lifestyle adjustment, the move is usually slow with an eye on just the right location, complex and unit with a lot of time spent on figuring out how to adjust life, furniture, possessions, cars and hobbies.

One of the main pros for the apartment choice is the lock and leave lifestyle especially for snowbirds, those people that spent their winters in warmer climates. There are also many age 55+ condo complexes in the city. This is a great option for seniors that want the social atmosphere, amenities, and community support available.

The apartment market is often not as varied as people would hope. There are a large number of compact units with fewer options for larger sizes and flexible bylaws. Apartments also have condo fees. When considering even a modest condo fee of $0.50 per sq ft then that a 1000 sq ft condo can easily cost over $500 a month in condo fees alone. Most are higher especially in complex with more amenities.

As mentioned, some people are ready for the lifestyle change, but others are very far from accepting the adjustment easily.

One of the biggest challenges is pets. Most condos, apartments, and townhouse complexes alike in Calgary, restrict pets. There are some that allow pets but finding one that allows dogs over 20 pounds is often a big challenge. I have had a townhouse condo corporation deny an application for a buyer to keep their 12 year old 40 lb dog in order to buy the unit.

Another consideration is rules. Some people really like rules. Some people really don’t like rules.

Retirement Home Options

I should also mention the retirement home option. I’ve recently delved into understanding this market specifically built to support seniors with options ranging from independent living units, seniors lodges and medically assisted care facilities. These are group home settings of various styles that offer additional services, meal services and additional care options. This is usually not ‘the Downsize’ so I wasn’t sure if I should include this category, but then decided to include it just from a planning and pricing perspective.

There are some government subsidized options for low income seniors, but wait lists are long and there has been an increase of private facilities in recent years with private tier pricing to match. Even this week the pricing issues made the news for one complex.

City Development and Planning

Even before the current housing crunch, the City of Calgary put forth administrative policy changes around community planning and housing density. This has only been accelerated by recent housing shortages.

Reading through the documents there is a lot of focus on density, but I haven’t found much context or response regarding single level housing, aging in place or planning for the demographic shift for the general market.

Two things need to happen. There needs to be a more thoughtful consideration of the number of people entering retirement age in the coming years. As well, there needs to be a review of the standard bylaws and structures that currently govern condo corporations.

From Statscan Population Projections:
“The proportion of seniors (aged 65 and over) in the population would increase from 17.2% in 2018 to between 21.4% (slow-aging (SA) scenario) and 29.5% (fast-aging (FA) scenario) in 2068. The increase in the share of seniors would be most pronounced between 2018 and 2030, a period during which all members of the baby boom would reach age 65 and over.”

The Myth Concluded

So I dispelled the myth and you may be feeling the feeling others have felt when long held plans and current options don’t align. Maybe contact your local government representatives to voice your opinions about housing and home planning. Or maybe time to talk to your financial planner and family and look forward to a new plan that works for you.


May you always find your way home.

How To Save Money on Your Mortgage

Save Money on Your Mortgage

I originally wrote this article in 2002 before the rates started their upward climb to where they are today hovering just below 7% for a 5 year posted fixed rate.   This series of options to help save money on your mortgage is valuable both to those paying current rates and especially to those that have not yet renewed. 

If you recently renewed or opened a newer mortgage at the higher rates, see what options may work for you to save some interest charges.

If you are paying a lower rate, see all the options but especially consider the section, “Prepare Yourself for Rising Interest Rates”. If the payments are too hard on your family then use the time to plan your next steps.

 All calculations below were made using the Mortgage Calculator from the Financial Consumer Agency of Canada.

Understand any administrative costs and penalty costs that could be associated with your mortage.

Life can change between the time a mortgage is signed and the current term (usually 5 years) is over. Ask your lender or mortgage broker the following questions and any others that may apply to your future self. It is ok to ask them to calculate some examples for you so that you can better understand.
  • Moving to a new home but keeping your mortgage to purchase a different home: What if I want to sell my current home and move to a new home within the term of the mortgage? Can I port/move my mortgage to a different property? What if I move to a different province? Are there limitations if I want to increase or decrease the mortgage amount? What are the costs, fees and penalties that may apply?
  • Selling without buying another property: What if I wish to sell my home during the term of the mortgage and pay out the mortgage with the proceeds? What are the limitations and costs? What penalties would I pay and how are they calculated? Ask specifically what the costs are if rates go down and the posted current rates are lower than the rates you are paying. If you do not hear the term ‘interest rate differential’ then ask more questions.

Work with a Lender that Allows Pre-payments

The single biggest strategy is to ensure your mortgage is with a lender that allows you make these changes in the first place and that you understand all the options available to you. Some lenders offer a great rate, but then restrict your ability to modify or pay down your mortgage early.

When you are already in your home with a mortgage and the term is expiring you may receive documentation from your bank to extend for another term. You don’t need to sign on for another 5 years if you know changes are upcoming. You can ask for a shorter term, an open mortgage and many other options that would avoid costs and penalties.

The Basic Example for Comparison

All of the examples use the same example to make things easier to compare.
$375,000 mortgage – the amount you are borrowing from the bank
25 year amortization – the length of time to pay off the mortgage in full
5 year mortgage term, monthly payments – the length of time of the current payment details
3% interest – current interest rate
Fixed rate mortgage – the interest rate stays the same for the duration of the mortgage term

 

 

Over the 5-year term, you will have made 60 monthly (12x per year) payments of $1,774.67 and have paid $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of your 5-year term, you will have a balance of $320,529.78.

Over the 25-year amortization period, you will have made 300 monthly (12x per year) payments of $1,774.67 and have paid $375,000.00 in principal, $157,401.19 in interest, for a total of $532,401.19.

Change to Accelerated Bi-weekly Payments

This method is especially effective for those that get paid on a biweekly schedule. Your income and mortgage payments will line up and takes advantage of those extra paycheques a couple times a year when 3 paycheques arrive in one month.

You end up making two extra payments during each calendar year when there are three pay periods in the month instead of two.

You can start using this method of saving money on your mortgage the day you read it. You simply call your bank and ask to start taking your payments out on a rapid bi-weekly schedule. You can also request that the bank coordinate your payments with your pay day. It has always been easier to pay your bills on the day you get paid.

The original mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost of the mortgage is $532,401.19.

Implementing a Bi-Weekly Payment:

You now would be paying bi-weekly payments of $887.37.

You would pay $64,109.36 in principal, $51,244.23 in interest, for a total of $115,353.59.

At the end of the 5-year term you would have a balance of $310,890.64.

The total cost of the mortgage is $513,062.67.

What You Will Save using an accelerated bi-weekly payment:

You will save $766 in interest payments over the first 5 years.
You will save $19,338.52 over the life of the mortgage and pay off your mortgage almost 33 months sooner.

Topping Up Your Regular Mortgage Payment

Topping up your mortgage payments by $50 or $100 can make a big difference over the long term.

Using this method, you make an extra payment towards your principle with every regular payment by adjusting the amount of your monthly payment with your lender.

Depending on whether you choose to make your payments monthly, bi-weekly or weekly you can choose to pay a little bit extra on your principle with every payment.
It is a lot easier to pay a bit extra each month than let it sit in your account and not touch it until a ‘later’ lump sum payment.

This method makes it easier for many people to budget and save. Another idea to consider is to round up your payments. Sometimes for a budget it is easier to remember that your monthly mortgage payment is $900 than $835.81. If you can afford to pay the $900 then talk to your financial institution about rounding up your payments.

The original mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost of the mortgage is $532,401.19.

Implementing an extra $50 per month:

Your monthly payment would be $1,824.67  ($1,774.67 + $50.00). 

You would pay $57,701.07 in principal, $51,779.18 in interest, for a total of $109,480.25.

At the end of the 5-year term you would have a balance of $317,298.93.

The total cost of the mortgage is $525,461.70.

What You Will Save topping up your payment by $50:

First, you save $230.81 more in interest over the first 5 years.

Secondly, you save $6,939.48 in interest and pay your mortgage off 12 months sooner over the life of the mortgage.

Take Advantage of Double-up Payments Offered by Most Banks

The double-up advantage allows you to make an extra payment usually equal to your normal monthly payment. Depending on your financial institution, you can make anywhere from 1 to 12 double up payments annually.

Each double-up payment is applied directly to the principle on your mortgage. This means you save thousands each and every time you make one of these double-up payments. Even one double-up payment per year can make a difference.

This option is almost the same as doing bi-weekly accelerated payments. It can be hard for people to save an entire mortgage payment to put down every year but others may find this a perfect use for an RRSP refund or other bonus funds.

The original mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost of the mortgage is $532,401.19.

Doubling a Payment Once per Year:

Your monthly payment would be $1,774.67 and you will have made an extra doubling payment once per year of an additional $1774.67.

You would pay $64,184.26 in principal, $51,169.33 in interest, for a total of $115,353.59.

At the end of the 5-year term you would have a balance of $310,815.74.

What You Will Save By Doubling Up a Payment per Year:

First, you save $840.66 more in interest over the first 5 years.

Secondly, you save $19,620.88 in interest and pay your mortgage off 34 months sooner than over the 25 year amortization of the mortgage than if you had made the same mortgage with no prepayment.

Consider Shortening the Amortization Period on your Mortgage

Today you can get 25 or 30 year mortgages. Some people choose a longer amortization period to have lower payments, but sometimes people have a small mortgage compared to their willingness or ability to pay it down and don’t realize they can shorten the amortization period on their mortgage to save themselves significant amounts of money.

This tip can be a bit more painful in the wallet, but it can also have dramatic effects on how much money you save in interest and payments. By reducing your amortization period by just 5 years you can save thousands of dollars.

You can instruct your bank to do this on anniversary dates or when your current term expires. Some institutions will allow you to change this at any time but may charge a penalty for doing so. Some banks will offer it as an incentive to attract new business.

In this example we will compare the cost of a 25 year amortization (the original example) to a 30 year amortization offered by a lender.

The original mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost of the mortgage is $532,401.19.

Compare to a 20 year option:

Your monthly payment would be higher at $2076.25.

You would pay $73,957.55 in principal, $50,617.74 in interest, for a total of $124,575.29.

At the end of the 5-year term you would have a balance of $301.042.45.

The total cost for the mortgage over the 20 year amortization period is $498,301.16.

Over the life of the mortgage you will save $34,100.03 in cost by changing from a 25 year to a 20 year amortization.

Prepare Yourself for Rising Mortgage Interest Rates

A 3% mortgage rate is historically a very low rate. It will most likely go up and it is important to be financially prepared for that change.

It is exciting to buy your new home, but being house poor isn’t fun either when you then can’t afford the other things life offers.

A good way to get prepared is to calculate the difference and set it aside each month. Once you are comfortable then use that money for an extra prepayment on your mortgage. Or add it to your payment now and see the benefit of the principle payments going down before the rates increase.

The original mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost of the mortgage is $532,401.19.

As rates increase:

The same mortgage with a 3.5% fixed rate would be a monthly payment of $1,872.26.

The same mortgage with a 4.0% fixed rate would be a monthly payment of $1,972.58.

The same mortgage with a 5.0% fixed rate would be a monthly payment of $2,181.02.

The same mortgage with a 6.0% fixed rate would be a monthly payment of $2,399.27.

The cost of rising interest rates:

Based on our basic example at a 3% rate the monthly payment would be $1,774.67 and the total cost of the mortgage over the 25 years would be $532,401.19.

At a 6% rate the monthly payment would be $2,399.27 and the total cost of the mortgage over the 25 years would be $719,782.45.

That is $187,381 extra that you have to earn.

Combining Strategies to Save on Your Mortgage

We all need a place to call home. We also need to be informed about what it costs us over the long term. It is so easy to get excited about home shopping and getting caught up in the excitement.

Take the time to see if any of these ideas can save you a bit of money in the long term.

There are additional strategies such as saving a bit of extra money for RRSPs and then using the refund to pay down on the mortgage.

These examples are generic. Run a couple of options with your own numbers and see what the impact could be. You can combine options to find a payment schedule that works best for you to save where you can and have enough money to enjoy life without going house poor.

 

May you always find your way home.