The thorny issue of allowing Canadian homeowners to deduct mortgage interest payments from their income tax is back in the news, after the Canadian Institute of Actuaries suggested it would help people save for retirement. And that's important because a recent study commissioned by the group says that two-thirds of Canadians expecting to retire in 2030 are not saving enough money to avoid financial hardship.
The study is called Planning for Retirement: Are Canadians Saving Enough?. According to the institute, the answer is no.
"The message for most Canadians in their early to mid-40s is they will need to save more if they expect to enjoy an independent retirement," says Normand Gendron, president of the institute. "Governments need to provide Canadians with more education about the role that different savings vehicles can play in generating retirement income, and provide tools and incentives that encourage more households to save."
The study says, "Home equity can have a very positive financial impact on the ability of individuals to narrow the gap between what they will receive from the public pension system, and the income they will need in order to cover necessary living expenses in retirement (provided the home is paid for when you retire) … . Allowing the interest paid on mortgages to be deductible would further narrow the gap."
Conducted by a research team at the University of Waterloo's Department of Statistics and Actuarial Science, the study developed 72 household profiles to determine if those born in the early to mid-1960s are saving enough for retirement. It found that although Canada's pension system is working well and should be "financially viable" for the next 75 years, too many people are relying exclusively on using the system at retirement. It is designed to replace only about 40 per cent of gross income. Individuals must build upon this modest income through some combination of workplace pension plans, RRSPs, home ownership and personal savings, says the study.
It says about 70 per cent of those studied have some home equity, so for many Canadians, "the adequacy of their retirement income will be dependent on the value of their home's equity. In a number of ways this makes the retirement decision a risky one. Property values, on average, have tended to increase over time; however, individual properties may decline in value," says the study.
"Although purchasing a home by paying a mortgage is a form of regular saving, because of the size of the mortgage relative to one's income, there may be little other available income for saving for retirement in any other vehicle," says the study. "It is risky to have most of one's retirement in a single investment, especially an investment that may be illiquid and whose price may fluctuate."
The study says, "Some argue that the baby boomers will all wish to sell their houses at about the same time, driving down prices. This would be cruel irony if those same baby boomers are counting on the value of home equity to provide adequate income in retirement."
But it notes that others believe that despite the long Canadian housing boom, house prices in Canada are still undervalued on a global scale, and that demand will continue to drive prices up.
Four years ago, during a provincial election campaign in Ontario, the Progressive Conservatives promised to introduce a partial tax break ( Home Builders Contractors House Renovation Architects Design Decorate Furniture ) for mortgage interest payments. Although the idea was enthusiastically supported by the housing industry, the Conservatives lost the election. Prior to that, the last government to propose the idea was a federal Conservative government led by Joe Clark in 1979. It also went down to defeat.
Opponents of tax deductibility fear that the move would spur too much speculative investment in housing, creating the risk of more foreclosures, as is currently being seen in the U.S. Homeowners in Canada also get the benefit of a capital gains exemption when they sell their principal residence.
A report by CIBC World Markets says the arrears rate in residential mortgages in Canada is "still extremely low" at 0.26 per cent. While the report predicts the rate will rise during the next six to 12 months, a strong labour market will prevent the rate from climbing to levels currently seen in the U.S., says CIBC World Markets.