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Debt sword hanging over heads of Canadian seniors

The reader who called was 68 years old, divorced, still working full time to make ends meet and living in fear of her financial future.

The reader who called was 68 years old, divorced, still working full time to make ends meet and living in fear of her financial future. The elephant on her back is debt — $117,000 owing on a mortgage, $15,500 on a line of credit and $100,000 on her credit card. Unlike many people, at least she has assets to sell and live off. But once her investment accounts, dollar bill collection and car will be gone, she faces the heartbreak of having to sell the home she has lived in for decades and leave her neighbours behind. HomEquity Bank reports that 91 per cent of Canadian seniors want to stay in their homes, but only 78 per cent have any savings and investments, and only 40 per cent have more than $100,000.

Sizeable debt is becoming a ticking time bomb for more and more seniors. Statistics Canada reports Canadian household debt is at a record high 167.3 per cent of disposable income. The amount of debt in households headed up by people age 55 to 64 almost quadrupled between 1999 and 2012, with one-third still having mortgages and 38 per cent having credit card or instalment debt. The problem figures to worsen, as for the first time in history Canada has more people age 65 and older than people under age 15, namely 16.9 per cent versus 16.6 per cent.

There is good debt, which is money borrowed to buy assets that normally appreciate in value such as real estate, and historically low mortgage interest rates have seduced seniors to get back into debt. There is also bad debt, such as loans on automobiles that immediately decrease in value. But good debt can turn into bad debt. People shrug off huge mortgages while their homes are going up in value, but if prices fall and mortgages become “underwater,” homes and condos can be foreclosed upon by financial institutions. Also, once you've used up all your investments to pay everyday living expenses, then mortgage debt can prevent you from buying groceries.

People with cash, perhaps from an income tax refund, wonder whether to invest the money or pay down debt. An Albertan making $50,000 a year would need an investment return of 3.92 per cent before taxes to be better off than paying down a 2.70 per cent five-year variable mortgage, or a 6.73 investment return to beat paying down a 4.64 per cent fixed five-year mortgage. You would need an investment return of 11.53 per cent before taxes to be better off than paying down a 7.95 per cent car loan, and a return of 28.99 per cent before taxes to be better off than paying down a credit card charging 19.99 per cent interest. So pay down credit card debt first. The Credit Counselling Society reports that 40 per cent of Canadians don't know the importance of paying more than the minimum amount of their monthly credit card bills. Even if you stop using your credit card and it has a balance owing of $5,000 charging 19.99 per cent interest, making the minimum monthly payment of four per cent of the balance would take 11 years and 10 months to pay off the $5,000 plus an additional $3,388 in interest.

Be leery of taking out a reverse mortgage, which allows seniors to borrow up to 55 per cent of the value of their home. Interest rates are much higher than mortgage rate; a five-year fixed reverse mortgage rate is currently 5.59 per cent. The amount you owe, plus interest, plus administration and closing costs, are deducted from the proceeds of your house when you sell or die. Former federal finance minister Garth Turner said reverse mortgages are “an ideal strategy for people who hate their children,” whose inheritances are eroded or eliminated.

If you will be running out of investments and other assets, consider increasing working part-time or renting out part of your home, and cutting back expenses like annual vacations. Less preferential is a Home Equity Line Of Credit. Otherwise, get mentally ready to sell your home and downsize, perhaps living in a condo to avoid major home renovations.

Ray Turchansky is a tax and personal finance consultant.