Struggling on a fixed income

Reverse Mortgages: Accessing Home Equity to Combat Rising Retirement Costs

Sometimes even the best retirement plans hit some unexpected twists and turns. As the economic environment continues to be impacted by persistent inflation and high interest rates, the pressure is mounting for Canadian households.  This is especially true for those on a fixed income.

One of my readers, Ruth, reached out recently.  She’s 68, widowed and really feeling the pinch from years of rising costs.  She’s had to go into credit card debt to afford groceries and life in general and is facing sleepless nights wondering how she’s going to pay them off. With Ruth’s kids both living in Europe, she worries about her personal care moving forward too.

Ruth isn’t alone.  It’s estimated that those age 65 and older, on average, are facing debts around $50,000 with 15% in that cohort facing significant credit card obligations.  And according to FP Canada, 25% of seniors are worried about affording their long-term care.

So, what can you and Ruth do if you’re concerned about your future and looking to help offset rising costs?

Seniors, like Ruth, on a fixed budget may face challenges managing rising costs and inflation, especially if they spend a large portion of their income on necessities like food and shelter. Some possible ways to cope with inflation are:

  • Review your budget and spending habits regularly and look for ways to reduce expenses or increase income.
  • Seek help from charitable organizations or government programs that offer assistance to low-income seniors, such as food banks, subsidized housing, tax credits or benefits.
  • Consider downsizing your home or moving to a less expensive area if you can reduce your housing costs significantly.
  • Invest some of your savings in assets that can hedge against inflation, such as stocks, real estate or commodities. However, be aware of the risks and fees involved and consult a financial advisor before making any investment decisions.
  • Try reverse budgeting.  Essentially, comb through a couple of months of your banking and credit card statements.  This helps you see where your money went and what waste you can cut.

If you have credit debt, you may want to explore some solutions to pay it off and improve your cash flow. One option is a reverse mortgage, which is a loan that allows you to get money from your home equity without having to sell your home or make regular payments. You can use the money from a reverse mortgage to pay off your credit debt or other expenses.  For Canadian homeowners, the good news is that, despite a sluggish 2022, the long-term success of the housing market has created an opportunity to tap into home equity to help accommodate rising costs.

A reverse mortgage is a loan that allows senior homeowners (55+) to borrow up to 55% of the value of their home without having to make any regular payments or sell their home. Some seniors use a reverse mortgage to free up cash and pay off credit cards and other high interest rate debt. However, there are also some pros and cons of reverse mortgages that you should consider before applying for one.

Some of the advantages are:

  • You can better manage your expenses in retirement and supplement your income
  • You don’t have to prove your income or credit score to qualify
  • The money you borrow is tax-free and does not affect your government benefits
  • You can choose how to receive the money, either as a lump sum, monthly payments, or a line of credit
  • You can stay in your home as long as you want and maintain the title and ownership of your property

Some downsides to consider include:

  • Reverse mortgages can be more costly than other debt options
  • You reduce the size of your estate because compound interest is eroding the equity of your home (although you have the option to make payments should you choose)
  • There may be fees and costs at your death that your estate and or beneficiaries will have to deal with.

A reverse mortgage is not the only option to deal with credit debt. You may also consider other alternatives, such as:

How did Ruth make out?  She contacted her bank and was able to move into a lower interest rate product, slashing her credit card interest rate from 24.99% to 12.99%.  This one step is going to save her thousands of dollars paying off her card, even if she never pays more than the minimum payment.  But Ruth wasn’t feeling that her situation improved much after cutting her expenses even more than she had.  She sat down with her financial advisor and was pleasantly surprised the tapping into her home equity using a reverse mortgage not only freed up more than enough cash for her to pay off her credit cards, but it also gives her the confidence that she has more than enough income to life retirement on her terms.  Plus, it eases her mind that should the time come, she has enough to pay for help around the home to help her age in place and comfort.

Even if you’re on a fixed budget, there are options available to older Canadians who are facing rising costs and inflation and have credit debt. It’s important to weigh the pros and cons of each option carefully and seek professional advice before making any financial decisions.

Talk to your family or financial planner, or search the web for more info about how reverse mortgages are helping Canadians live retirement on their terms.