For many seniors, managing finances in retirement can be a challenge. Unexpected expenses, healthcare costs, and existing debts (like conventional mortgages), can put a strain on finances during a phase of life that should be enjoyed.
There are options. A reverse mortgage, for example, can act as a debt consolidation loan—a powerful solution that can clear multiple debts at once and make for a more comfortable retirement. Let’s dig into how a reverse mortgage and debt consolidation may be of benefit to you.
What is debt consolidation?
Debt consolidation is when you take out a loan to pay off multiple high-interest loans, such as lines of credit or credit cards, with single more manageable lower-interest payments.
However, it can be difficult for retirees to meet the qualification requirements for personal debt consolidation loans. While requirements vary across lenders, they typically request high credit scores and proof of income to ensure you can manage the monthly payments.
Some other options for consolidating debt include:
- Line of credit
- Tapping into savings
- Selling investments
- Home equity line of credit (HELOC)
- Second mortgage
- Refinancing
Another option growing in popularity for Canadian seniors looking to consolidate debt and ease cash flow is the reverse mortgage. How can a reverse mortgage help you consolidate debt? First, let's get into the basics of a reverse mortgage.
Reverse mortgage basics
A reverse mortgage is a type of loan that allows you to turn a portion of your home equity into tax-free cash that you can use however you wish.
You may be able to borrow as much as 59% of your home’s value and receive the funds either as a lump sum or payments over time, all while your home remains yours.
Unlike a conventional mortgage, you aren’t required to make monthly payments. Instead, the loan's interest accumulates over time on the remaining loan balance. During this time, your home's value may continue to rise.
Your only obligations are that you maintain the property, pay your property taxes, and keep your homeowners’ insurance current.
When your home is eventually sold, the proceeds go towards settling the loan balance, and what’s left over is yours or your heirs to keep.
Since a reverse mortgage does not require monthly payments, it can be an excellent tool to pay off other debts or mortgages that do require monthly payments.
Learn more about how a reverse mortgage works.
Benefits of using a reverse mortgage to consolidate debt
No monthly payments
Like many Canadians, you’re likely managing multiple monthly debt payments, such as an existing mortgage, credit cards, medical bills, or personal loans.
With no monthly payments required on a reverse mortgage, you can use your released funds to pay off accumulated debt—resulting in better cash flow and peace of mind.
Improved cash flow with flexible advances
With a reverse mortgage, you can choose to receive funds as a lump-sum one-time advance or in monthly instalments, giving you flexibility around how you prefer to use your funds.
This can be particularly beneficial for those looking to improve cash flow and cover ongoing living expenses, such as health care costs, without relying on high-interest loans or credit cards.
Easy qualification
To determine reverse mortgage eligibility, income and credit score requirements are not as strict as they are for other types of loans.
Eligibility is instead based on age, home value, and location, which makes debt consolidation for seniors more accessible.
Simplified financial management
For retirees looking to consolidate debt, a reverse mortgage can help streamline finances.
Rather than juggle multiple payment deadlines and interest rates, you can use your reverse mortgage funds to pay off debt—giving you more time to focus on what’s most important to you.
Enhanced retirement incomet
The funds received from a reverse mortgage aren’t considered as income, so your eligibility for government benefits, such as Old Age Security (OAS) or Canadian Pension Plan (CPP), will not be affected.
You stay in the home you love
With a reverse mortgage, you get to stay in your own home, while you pay off any outstanding debt. Once debts are cleared, many reverse mortgage holders have money left over to put toward enjoying retirement the way they hoped.
To read more about how a reverse mortgage could be of benefit to you, visit our blog post on reverse mortgage pros and cons.
As a Canadian homeowner, you’ve worked hard for the equity in your home and deserve to enjoy your retirement years without the burden of debt.
A reverse mortgage can be a beneficial debt consolidation loan for seniors—and a pathway to financial peace of mind.