Downsizing and home equity: turning part of your house into retirement income

Home equity as a retirement resource

A paid-off home lowers living costs, since there's no rent or mortgage, but the equity itself doesn't pay for groceries or travel. Retirees who are "house rich, cash poor" often have plenty of net worth and relatively little income.

There are four broad ways to use that equity: sell and move somewhere less expensive, sell and rent, borrow against the home while living in it, or keep the home and treat it as an estate asset or a reserve for later care costs. Each comes with different costs, risks and effects on your plan.

The main options compared

None of these options is right for everyone, and many people combine them over time, for example staying put in their 60s and moving in their late 70s.

• Downsizing: selling and buying a smaller or less expensive home releases the difference, minus selling, buying and moving costs. Property taxes, insurance and maintenance may fall too.
• Selling and renting: releases all the equity and removes maintenance responsibilities, but rent is an ongoing cost that typically rises over time, and you no longer benefit from changes in home values.
• Reverse mortgage: lets homeowners of a minimum age borrow against their home without regular payments. Interest accumulates on the balance, which is repaid when the home is sold or the last borrower moves out or dies, so the remaining equity shrinks over time.
• Home equity line of credit: flexible borrowing, but it usually requires regular interest payments and qualifying on retirement income, and the lender can change the terms.
• Renting out part of the home: a basement suite or room can create income, which is taxable and may affect the tax treatment of the home; confirm the rules with the CRA.

A worked example: Linda and Bill in British Columbia

Suppose Linda and Bill are 68, live in British Columbia and own their home outright. They have $350,000 in RRSPs and $60,000 in TFSAs, and their CPP pensions are based on estimates of $1,100 and $800 a month at 65. They'd like to spend $72,000 a year after tax, including travel while they're healthy.

If they stay in their home and rely on their savings, CPP and OAS, the calculator estimates their savings run out at 80, leaving 15 years below their target. The highest steady spending their current resources support to 95 is about $58,000 a year. These figures assume 5% returns, 2% inflation and today's dollars.

What freeing up equity changes

Now suppose they sell and buy a smaller condo, and that after all costs the move frees a hypothetical $400,000. They put $90,000 into their TFSAs, using room they hadn't used, and invest the remaining $310,000 in a non-registered account.

With the same $72,000 spending, the plan now lasts to 95 with about $263,862 left after tax. The highest steady spending it supports rises from about $58,000 to about $78,600 a year. Their estimated lifetime tax rises from about $137,932 to about $165,860, partly because their savings last longer and keep generating taxable withdrawals.

The model doesn't adjust for changes in housing costs, such as lower property taxes or new condo fees, so those would be worth adding to any real comparison. It also treats non-registered growth as losing a share to tax each year, which is a simplification of how interest, dividends and capital gains are actually taxed.

Tax considerations when you sell

In Canada, a gain on the sale of a home that qualifies as your principal residence for every year you owned it is generally sheltered by the principal residence exemption. You still report the sale and the designation on your tax return for the year of sale. Rules can differ if part of the home was rented out, used for business, or if you owned more than one property, such as a cottage. The CRA's guidance on the principal residence exemption covers the details.

The money released is not income, so it doesn't affect OAS or GIS by itself. What you do with it matters, though. Investment income from a large non-registered account is taxable each year and counts toward the OAS recovery threshold, $95,323 in 2026. Placing part of the proceeds in TFSAs, as Linda and Bill did in the example, keeps that portion's growth and withdrawals out of taxable income. The TFSA in retirement guide explains how room works.

Costs and questions beyond the numbers

Real estate commissions, legal fees, land transfer taxes, moving costs and renovations can take a meaningful share of the equity released, and they vary by province and city. The price of the next home often surprises people too, since smaller homes in desirable areas aren't always much cheaper.

Non-financial factors frequently decide the question: proximity to family and health care, accessibility as mobility changes, community ties and the effort of maintaining a larger property. Some provinces also offer property tax deferral programs for seniors who stay in their homes; our British Columbia page and the provincial benefits hub list programs by province.

Fitting home equity into your plan

Because home equity is usually released once, the timing interacts with everything else: when you start CPP, how you sequence withdrawals and what you'd like to leave to heirs. Some couples plan to keep the home as a reserve for future care costs rather than spend it on travel.

The retirement plan tool lets you test a plan with and without freed-up equity, and the withdrawal order tool shows how a larger non-registered account changes the drawdown. If debt is part of the picture, see retiring with debt or a mortgage.