The Story of Trust Deeds

A couple are looking into purchasing their first property together. One of them already has a nest egg ready to put into getting on to the housing ladder… and the other? Well, he or she has tried to scrimp and save but just can’t resist the lure of decent wines/holidays/nice clothes/Xbox credits. You get my point. Buying a house together might seem like the perfect way to cement a loving relationship but it is undoubtedly a financial risk if, like many relationships, the financial elements of the union are anything but equal. In this scenario, it can be wise to look at having trust deeds drawn up.

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Although not the most romantic concept, a trust deed can protect both parties when looking to purchase property. Commonly referred to as a ‘declaration of trust and cohabitation’ or ‘co-ownership agreement’, a trust deed is a legal agreement between two joint owners which can specify the amount of capital each party contributed to the purchase, the agreed shares of ownership and exactly what should happen if one of the parties dies. A depressing thought. However, assuming you have years of cohabitation ahead of you, a trust deed can also provide legal protection if one of the owners leaves the home or starts a dispute over such things as building extra rooms or adding a conservatory. Basically, a trust deed can cover any potential outcome and could prove invaluable in the event of changing circumstances.

If, like our couple, one of you has invested more money into climbing onto the housing ladder, you might each agree that it is fairer to have this reflected in your share of the property. Let’s say you put in 80% of the funds needed and your other half managed to scrimp together the remainder. Surely you would want this reflected in bricks and mortar? A trust deed will ensure this happens by apportioning your interest in the property accordingly meaning that, if you ever went your separate ways and the house had to be sold, you would get your fair share back.

Of course, you and your partner may well live together forever in harmony. However, it makes sound financial sense to consider distinctly unromantic elements before buying a house with a loved one. As anyone who has been burned by a greedy ex will tell you, a trust deed can ultimately negate a great deal of heartache.

Your Home: Is it Really an Asset?

When looking for a home 5 years ago one thing that my real estate agent was adamant about was that a home would be a huge asset and an excellent investment. While, this is true in some ways, it has greatly affected my finances which makes me wonder if it was REALLY the huge asset she had believed it would be.

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A Mortgage is a Liability

People like to think that they own their homes. Until the mortgage is paid off, the reality is that the bank owns a good portion of your house. This mortgage is a liability, it’s a loan, one that you are paying a great deal of interest on.

When calculating your net worth you will want to subtract what you owe on the mortgage from the home’s market value. If the value of your home has lost money since you bought it, you may find yourself underwater – your home is not a true asset.

A Home is Not a Liquid Asset

The term liquid refers to how easily something can be converted into cash. For example stocks are easy to convert into cash, you just have to sell them. Your home is very different. Yes, you have lots of equity in it, which you can take out if you need to, but if you are borrowing against your home’s equity this isn’t really investing.

More often than not it’s actually difficult to sell your home for profit. The process of selling a home can be costly and can take months. A home in reality is not a liquid asset and can be disappointing later on if you view it as an investment.

Your Home is an Emotional Asset

When the housing bubble popped I found that my home was worth less than I actually paid for it. Since then it has improved a bit, but by the time you calculate in interest, taxes, maintenance, utilities etc. I’m not breaking even on anything.

Instead of thinking that the house is going to provide me with a great return on investment, I like to think it’s more of an emotional asset than a financial one. Being my own landlord and being settled in one place with a nice backyard and a sense of security provides value in a different light than many other types of investments.

Thinking About Downsizing?

Some thing that many retirees consider is downsizing from their current home, which they likely have a lot of equity in, to a smaller, less expensive, home, town home or condominium. But is this a good idea? Is it wise to downsize?

Realestate retirement plan

Many people consider selling their large family homes, which they have a lot of equity in as part of their retirement plans. When you are ready to downsize it’s important to think about where you will be moving to and which type of home to want to buy for retirement. Many retirees choose to move into condos. As a retired person living in a condo has many advantages that allow them to be worry-free such as no lawn care, snow removal, the availability of a fitness center and pool in some cases and also having the ability to travel at a moments notice since you have less responsibilities centered around your home.

After a decade of record breaking house prices in the greater Toronto area this is an appealing direction that many are moving towards there are endless possibilities. You could even choose to have a cabin near a lake or ocean in a more rural location, no more commute, less maintenance and beautiful quiet surroundings.

One problem with downsizing however is that it may it always work out the way that you would think that it would. In many cases home owners walk away with less money that they had anticipated. For example if you are downsizing from a $400K home to a $300K home there will be little left after real estate and legal fees.

This doesn’t mean that downsizing can’t work for you, if you do it right you can walk away with a nice nest egg that will allow you to do the things that you dreamed of such as traveling.

Be Honest About It

Why are you planning to sell your large family home? Financial reasons? Practical reasons? Have your kids moved away? Is your house just too big? Do you want to move closer to your grandchildren? Do you enjoy travel and it is unnecessary? – these are all good reasons to consider downsizing.

Assess Your Needs

How will you live your daily life? Should you consider a bungalow? Is the convienience of a condo appealing to your needs? Take a look at the activities that you currently participate in and those that you wish to participate in and go from there. Taking a look at what you need will help you determine what you do.

Location, location, location

Decide where it is that you actually want to live. What would you like your retirement to look like? Do you want to be in a rural or urban area? Do you want to be closer to your family? Do you want to downsize to a smaller home or condominium?

Smaller does not always equal cheaper

Depending on where you are moving to you may find that monthly expenses are higher than you currently pay. These trade offs can be difficult to quantify, for example if you are moving into an urban condo with many amenities you might find the condo fees can be very high.

Price it Out

If you are considering downsizing make sure that you have realistic expectations. The truth is that most people will walk away with less than they anticipated.

For example: Let’s say you are moving from a $600,000 home to a $400,000 condo. You would think you’d be left with a whopping $200,000 for your retirement. Then you factor in real estate commissions of $30,000, $2,500 in legal fees, $3,000 in land transfer tax, moving fees of $2,500 and outstanding property taxes of roughly $1,500.

Now subtract any outstanding mortgage you have on your property and factor in any new furniture you may need for your now smaller environment. You may find that your downsizing has left you with a modest $50,000-$80,000.

To get a better understanding of what you can expect real estate agents can be very helpful.

Make a Plan

Financial advisers are excellent people to consult when you are putting together a plan for downsizing your home. They will help you draw up a financial plan that will outline many potential scenarios that can help you meet your retirement goals.