A recent poll done by CIBC and Harris/Decima has found that 59% of Canadian retirees are still in debt. Worse yet, the poll finds that 55% of people that carry debt into retirement have seen their debt levels either increase or remain unchanged over the past year.
As you can imagine, it only becomes more difficult to repay your debt once you have lost the bulk of your income due to retirement. So it stands to reason that every effort should be made to repay your debt before retirement, right? Easier said than done, of course, but it is possible. The earlier you start paying down your debt the better, but there are options, even if you are on the cusp of retirement.
Eliminate Credit Card Debt
First thing you need to do is to go after the low hanging fruit. Pay down your credit cards and other lines of credit, which often charge interest at rates that border on usury.
If you own your own home, one way to eliminate your high-interest debt is through a debt consolidation mortgage. With today’s low mortgage rates, you can save yourself thousands of dollars in future interest payments by leveraging your home to pay off your credit cards. Why waste your money paying off $20,000 in credit card debt at 18 or 19% interest, when you can do it a much lower rate in the range of 3 or 4%?
That being said, the best way to eliminate credit card debt is to never build any in the first place. Due to their high interest rates, credit cards should only be used as a short term source of credit and never as a medium or long-term loan. But of course, as we all know: life happens.
Using Home Equity to Generate Retirement Income
As it is with many other Canadians, often times a large portion of a retiree’s debt comes from an unpaid mortgage. With that in mind, it is clearly in your best interest to have your mortgage squared away before retirement—especially because you can use your home equity to generate retirement income.
Many people decide to sell their homes and downsize to less expensive property in order to have money available for retirement, but that is not the only way to take advantage of your home equity. A reverse mortgage allows Canadian homeowners aged 55 and older to receive up to 50% of the value of their home in tax-free income, either in one lump sum payment or in a number of payments over a period of time. Best of all, you maintain ownership of your home and do not need to make any payments until you decide to sell your home.
Pay off Your Mortgage Faster, Save Money on Interest
If you are thinking about retirement but are still paying off your mortgage, you should take stock of your pre-payment options, your payment schedule, and even your early payout penalties to see how best to pay off your mortgage faster.
For those unaware, pre-payments options (or pre-payment privileges) are the rules agreed upon in your mortgage contract that dictate exactly how and when you can repay your mortgage early without penalty. For example, a closed mortgage with “20 + 20” pre-payment options gives the borrower the option to increase the size of a month’s payment by 20% and also gives the borrower the option to repay up to 20% of the original mortgage principal each year. Exactly how much you can save depends heavily on what pre-payment options are available to you and what balance remains on your mortgage principal, but a mortgage calculator can give you a rough estimate. Taking advantage of this can save you tens of thousands of dollars over the life of your mortgage.
Additionally, many lenders provide for an accelerated payment option that essentially lets you make 13 months of mortgage payments each year instead of 12. Each accelerated mortgage payment, often offered in weekly and bi-weekly payment options, is increased by a marginal amount that is prorated over the year to include an “extra month.” This extra amount goes directly towards paying off the mortgage principal, bypassing the collection of interest altogether. This option can cut years off the length of your mortgage and is another way to save thousands of dollars.
If you are in the middle of your current mortgage term and are paying a very high interest rate, you might also consider breaking your mortgage and switching lenders. For closed mortgages, you will have to pay an early payout penalty, but in many cases this penalty can be substantially less than what you will save in accrued interest if you were to switch to a different lender with a lower mortgage rate. You can use a mortgage refinance calculator to see if this makes sense in your case.
These are just a few things to consider that could make an enormous difference come retirement. If you have any questions on how to save money on your mortgage, contact one of our mortgage associates.