Did you know that more and more Canadians are heading into retirement carrying debt?
According to Statistics Canada, 42% of households headed by someone 65+ are in this position, with 13.9% paying off a mortgage and 37.4% carrying consumer debt.
This can put retired Canadians in a particularly difficult situation. According to the 2017 Canadian Income Survey, the average retirement income for an individual is just $27,500 and $61,200 for a couple, which can make it hard to pay off debt on top of daily living expenses.
This was the position that one of our clients, Mrs. Jane Smith, found herself in.
Mrs. Smith receives just under $20,000 per year through her OAS and CPP. She also works part-time at a local café where she earns $15 an hour, taking home about $240 per week.
Despite this, she was struggling to make ends meet each month and had gotten into the habit of putting one-off expenses, such as appliance repairs and vacations, on her credit card, which carried an interest rate of 19.99%.
Hoping to maximize her finances, Mrs. Smith came to Arrowsmith Mortgage Corp. and met with mortgage agent, Jody Henry, to discuss her options. Jody reviewed her situation in its entirety and recommended Mrs. Smith take the Income Advantage as a way of increasing her cash flow.
Income Advantage is a reverse mortgage that allows Canadians aged 55+ to access up to 55% of their home’s value in tax-free cash.
A quick calculation by Jody showed Mrs. Smith was eligible for $127,000. She accessed an initial lump sum of $20,000, which she used to pay off her credit card debt and opted to receive the remaining money as monthly deposits of $1,500. This allowed her to increase her monthly cash flow, so she was able to easily cover her monthly expenses and even enjoy the occasional treat without having to resort to credit cards. What’s more, since funds received through Income Advantage are 100% tax-free, they didn’t negatively impact her income by triggering additional taxes or OAS/CPP claw-back.
Income Advantage has a lower interest rate than credit cards (between around 4 and 6%) and requires no monthly repayments. This frees up even more of Mrs. Smith’s income. She will only have to pay back what she owes when she moves out of her home or passes away and will also maintain full title ownership.
Income Advantage has allowed Mrs. Smith to take advantage of the money in her home while she continues living in it. She is able to enjoy many more years in the home she loves, and if she decides to sell, the remaining equity will be worth more than if she had decided to downsize today.