Why aren't more advisors incorporating home equity into retirement plans?

While Canadian home prices have soared over the last decade, traditional retirement planning rarely takes home equity into account, focusing instead on other assets. Research funded by the Canadian Foundation for Financial Planning (formerly the FP Canada Research Foundation) sought to find out why.

Vishaal Baulkaran, associate finance professor at the University of Lethbridge’s Dhillon School of Business, and Pawan Jain, assistant finance professor at West Virginia University’s John Chambers College of Business and Economics, surveyed Canadian consumers and financial planners about their understanding and use of home equity release schemes (HERS).

These schemes include home equity lines of credit, second mortgages, refinancing homes, downsizing, selling a home and then renting, and selling a home and then leasing it back for life.

While Canadians are living longer in retirement, only a small proportion are dipping into home equity for income. When they do, the report found, it’s more often to cover financial hardships such as care or nursing.

The report warned that the issue of insufficient retirement income may be exacerbated by “a large portion of retirees’ assets” tied to their illiquid personal residence.

“Individuals who want to ‘age in place,’ with the right knowledge and information, can choose to unlock home equity while continuing to enjoy the comfort of their house,” the report said.

While planners said they’re comfortable providing advice about HERS, their preferred recommendation is to sell investments for extra income in retirement.

The report said some barriers to using home equity could be behavioural. On the client side, these include the products’ perceived complexity and personal attachment to their homes.

For planners, the authors noted the prevalence of mental accounting, or viewing the client’s home as a separate asset from the rest of their retirement assets.

“Financial planners with mental accounting bias use arbitrary classifications to put different assets in different buckets, leading to suboptimal asset allocation,” the report said.

“Such biased financial planners might put their clients’ residential properties in a ‘safe’ bucket and might advise against using these properties for funding retirement.”

The report didn’t mention conflicts of interest, but the risk of a perceived conflict could also be a factor, since freeing up home equity will often mean more assets for a financial planner or advisor to manage.

For the study, the researchers surveyed 1,200 Canadian consumers and nearly 500 financial planners who hold the CFP or QAFP certification.