👴🏽How Reverse Mortgage can be your answer for Consolidating Debt👵🏽
While living with debt can be tough at any age, living with overwhelming debt in your retirement years, without a steady income stream can be even tougher. A financial solution, such as a debt consolidation mortgage may help you roll all your high-interest debts into a single debt with manageable, lower interest payments. However, debt consolidation comes in many shapes and forms, and every option may not be available or suitable for your needs, life stage, and spending habits. Moreover, most banks or financial institutions look for a ‘good’ to ‘excellent’ credit score, as well as some form of income to cover your monthly repayment obligations. Which means retired Canadians without income sources may find it quite challenging to qualify for new credit. So, what is the best way to consolidate your debt in retirement?
A CHIP Reverse Mortgage may be the perfect solution for debt consolidation needs during your golden years. Many retired Canadians (55 years and over) have paid off their debt using a reverse mortgage.
Besides being the best way to consolidate debt in retirement, reverse mortgage allows you to:
- Keep more money in your pocket each month
- Stay in the home you love
- Be more financially secure without tapping into other retirement finances.
It is also worthwhile to think about how you got into debt in the first place:
- Spending habits: Are you a chronic over-spender?
- Financial literacy: Did you not plan for your retirement?
- Increased cost of living: Did your retirement planning go awry due to low interest rates, or skyrocketing costs of housing, healthcare or education?
No matter what your reasons, if you are looking for the best way to consolidate your debt, be prepared and committed to turning your financial life around. This means sticking to a budget, controlling your spending habits, and making timely payments towards your chosen debt consolidation solution.
Benefits of consolidating debt during retirement
Over the last few decades, more and more Canadian retirees seem to enter their golden years in the red. Not only is it becoming harder to save for retirement, but a recent survey indicates that one in four Canadian retirees are living in debt. Almost 66% have unpaid credit cards, 26% continue to make car payments, and 20% are still making mortgage payments.
Here are some of the benefits of consolidating debt:
- Unify multiple debts into one simplified monthly payment so that you do not have to keep track of individual due dates and varying interest rates
- Lower your burden by pledging an asset, such as your home to get out of debt faster
- Maintain or improve your credit rating by making timely payments and complying with the terms of your chosen debt consolidation plan
While there are advantages to consolidating debt, it is beneficial to Canadian retirees only if you:
- Qualify for a better interest rate than your current debt obligation
- Have the financial means to make the minimum monthly payments on your consolidated debt (if you choose an option other than a reverse mortgage)
Options for Debt Consolidation in Canada
When you are looking for a ‘pay all my debts in one payment’ kind of option, there are many ways to consolidate debt in Canada. However, each of these options to consolidate debt come with certain qualifiers or features that may be hard to meet during your retirement, especially if you have a limited or reduced fixed monthly income.
- Borrowing through your retirement savings account can attract an incremental withholding tax, as well as income tax, regardless of your age.
- Pledging assets for a secured debt consolidation loan will mean you risk losing them if you fail to meet the repayment terms.
- Getting low interest rates on an unsecured loan may be difficult if you have a poor credit score, or insufficient income to cover the debt.
- Using refinancing, HELOC or a second mortgage not only needs a minimum credit score, but the interest rates may be high, and upon non-payment, you run the risk of lenders foreclosing on your home.
- Signing up for a structured debt consolidation loan through a 0% balance-transfer card may require proof of income to cover your monthly minimum payments.
Why a reverse mortgage can be the best option to consolidate debt
Canadian retirees may find that a reverse mortgage is the best way to consolidate debt for a number of reasons.
- No monthly repayment burden: Cash in on your home’s equity and pay off your high-interest debts with a considerably lower interest reverse mortgage. Enjoy freedom from having to pay monthly principal or interest repayments – your loan becomes due only when you sell, move, or pass on.
- Easy qualifiers: You just need to be 55 years or older and own your home. Your income, credit score, or health check are not the critical deciding factors for securing a reverse mortgage. The mortgage amount primarily depends on your home’s location, type, condition, and appraised value, along with the accumulated equity in your home.
- No tax burden: Access up to 55% of your home’s equity and get tax-free cash in hand. Consolidate and settle your debts, and use the balance amount for a number of other expenses to maintain your financial security and independence.
- No impact on retirement funds: The borrowed amount from a reverse mortgage does not affect your eligibility for Old Age Security (OAS), Guaranteed Income Supplement (GIS), or income from Registered Retirement Savings Plan (RRSP). Enjoy the additional financial liquidity, without impacting your retirement finances
- Enjoy flexibility in payouts: Reverse mortgage is structured around your needs and preferences. Get the entire mortgage amount as a lump sum, or as part disbursals, with the balance amount paid out over a fixed timeline, or as and when needed. You get to decide how much or how little of the equity to access in the form of a debt consolidation mortgage.
- Retain your home ownership: Stay in the comfort of your home and reduce your monthly debt payments to zero. Since there is no transfer of title, you retain full ownership, while the lender receives only a mortgage lien. When the last homeowner passes on, the heirs can inherit the home, pay off the balance on the reverse mortgage, and keep the remaining equity.
- Get protection from market fluctuations: Although quite rare, if your home sale value falls short of the loan payable amount, your lender protects you against further liabilities through a negative equity guarantee1,2. This means, you or your heirs will never owe the lender more than the fair market value of your home.
From stringent eligibility criteria and hard-to-meet repayment terms, to heavy tax burden, and risk of losing asset ownership, other debt consolidation options pose many obstacles for Canadian retirees. The features and benefits of a reverse mortgage are unbeatable, especially when you step into retirement.
Consider the CHIP Reverse Mortgage® for consolidating debt into mortgage
For Canadian homeowners, 55 years or older, a CHIP Reverse Mortgage can be the best option to consolidate debt. Besides getting rid of all your high-interest debts, you get to stay in your home, and enjoy tax-free disposable cash for financing a more fulfilling retirement.