Emotional challenges, lack of education, and regulatory risk all factors behind lack of adoption, says financial planner
While home equity release schemes (HERS) offer a way for Canadians to tap into their largest asset for retirement and other needs, advisors recommending the strategies have several barriers to overcome, according to one financial planner.
“Equity release solutions are definitely things we consider at our practice,” says Scott Plaskett, senior financial planner and CEO at Ironshield Financial Planning. “Generally, we find that they're useful for opportunity expansion.”
As Plaskett explains, equity release solutions may be useful for house-rich clients, or those with a lot of wealth tied up in real estate. In many cases, they may need a large amount of liquidity to capitalize on a wealth-building opportunity or advance other financial objectives, but are unwilling or unable to sell off a property they own to do it.
Someone who wants to build up a portfolio of real estate investments, he says, could potentially tap the equity in a home they’ve completely paid for in order to buy a rental property. Equity release schemes could also be useful for clients who have liquid wealth, but their need for cash flow puts them at risk of outliving their liquid assets.
“When you’re equity-rich and cash-poor, you may look like a multimillionaire on your net worth statement. But if you can’t pay for dinner, it’s a problem,” Plaskett says. “I’m not saying it’s for everybody, but for people who say ‘I want to die in my boots at home,’ I’d say ‘Ok, then you may have to tap into the equity of your home.’”
Because tapping equity means taking on debt, the decision can become emotionally charged. For the majority of clients, the word “debt” conjures up a host of negative and will do everything in their power to get out of debt. Overcoming that hesitation, he says, will require a hefty dose of education.
“There’s a huge cost to not understanding the different types of debt that are available. Bad debt, you want to stay away from; good debt, you can actually use to help advance your wealth accumulation,” he says. “Clients want to know how to tap into the equity of their property because it’s a valuable asset, and the solution can be very easy to execute on once they know how.”
Some may be hesitant to adopt home equity release strategies, he adds, because they don’t want to put their family home at risk. To that point, Plaskett says home equity release schemes are most ideal for essential needs like medical expenses or health care issues.
“People are also very attuned to the fact that if you borrow money against your home, and it goes down in value, then you may get squeezed,” he adds. “They want to stay away from that, so they don’t even bother entertaining the idea.”
But the case for equity release schemes becomes clear when the conversation shifts toward taxation. For high-income earners who don’t want to add to their taxable income, he says taking on debt to gain access to cash might make sense.
“The cost of that debt may be so low relative to the cost of taxation you’d potentially incur on added income from other strategies that tapping into your home equity may be worthwhile, from a cash flow standpoint,” he says.
Even if advisors are properly equipped to recommend home equity release schemes, new research from the FP Canada Research Foundation suggests most would prefer to recommend selling investments. From Plaskett’s perspective, that bias might be due to a difference in the regulatory burden involved.
“In some cases, borrowing some money to put into investments and get a higher return can work out exceedingly well,” he says. “But there’s so much more regulatory oversight on somebody who’s borrowed money to advance their financial planning that financial advisors may even resist making that recommendation, even if the client is asking for it.”
Some Canadians might have tapped into their home equity, only to find themselves making higher interest payments today as a result of the Bank of Canada’s rate hiking. But in cases where the client bought a second property or investments, those interest payments are tax-deductible, which could tilt the balance in favour of continuing with the strategy.
“Oftentimes, the math sounds good up front. But in reality, you’ve got to be able to withstand market setbacks,” he says. “That’s why I think so much education needs to be done up front on these strategies – to help protect the clients from themselves, and to truly have them say ‘yes, I really do understand this, and it does make a lot of sense.’”
