Category Archives: personal debt

Jun 28 2017
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debt consolidation, debt management, personal debt, senior debt, Uncategorized

Debt horror stories are ‘the new normal’ in Canada

On any given day now you can expect to hear at least one economist, public official or financial commentator express grave concern about the mountain of debt Canadians now carry. The bloated debt loads of Canadian households has become a pervasive topic in media. But for all the attention the subject has received, it’s a safe bet that most people still cling to very clichéd notions that only so-called “deadbeats” ever hit the debt wall. Nothing could be further from the truth. The reality is Canadians would be shocked if they could peer into the private financial lives of many of their closest neighbours and friends.

As a licensed insolvency trustee firm, our practice is on the front lines of Canada’s household debt binge and the bad personal finance habits that ensnare so many people. And what we see every day is that the majority of those grappling with serious debt trouble are the most typical individuals and families you could imagine.

Here is just a sample of recent files that have crossed our desks: A staff accountant with multiple lines of credit, several maxed-out credit cards, a big mortgage, a significant home-equity line of credit (HELOC) and two leased luxury cars; a TTC driver with two mortgages and $100,000 in unsecured lines of credit; a teacher with eight payday loans and a senior financial analyst at a chartered bank with seven credit cards, all carrying high balances. I could go on and on.

Those disturbing financial cases are no longer the extreme end of the spectrum that they were at one time. They are the “new normal” in our trustee practice. The real horror stories are far worse, albeit less frequent.

The normalization of excessive debt is reflected in the data that Statistics Canada regularly releases. The household debt-to-income ratio now stands at 169.4, up 23 per cent from a decade ago, and on par with what the U.S. saw at the peak of its housing bubble. Of course, such figures are averages. According to the Bank of Canada, close to half of all high-ratio mortgages originated in Toronto were to borrowers with loan-to-income ratios in excess of 450 per cent.

A growing number of the clients we see have all the trappings of a middle class lifestyle—they’re gainfully employed, own a home and from the outside seem fiscally responsible—but it’s built on a foundation of debt and bad financial decisions. Many cases involve large tax arrears, such as a real estate broker who owes $383,000 to the Canada Revenue Agency in unpaid income tax. Others involve failed businesses. Then there are the frequent cases where financial companies inexplicably lend vast sums to underemployed people, even as their debt loads balloon out of control—in one case, a senior who emigrated to Canada 15 years ago, had never worked and been on a very low disability pension since shortly after arriving, owed more than $200,000 in credit card debt.

While the causes for these horror stories are varied and obviously complicated, there is almost always a common detail: Most clients in significant debt trouble today would not be in that situations had they simply funded their lives by cashflow instead of credit.

And that may be the crux: a decade of low interest rates has fuelled habitual credit reliance by consumers. Two or three decades ago, it would have been unthinkable for people to hold the equivalent of $30,000 or $40,000 (or more) in credit card debt. Yet now that has crept into the Canadian psyche as just something one does.

(By the way, have you noticed the “Estimated Time To Pay” wording on your credit card statement? It is a calculation of how long it will take to pay off your credit card balance if only the monthly minimum payments are made. The record we’ve seen is 330 years and 10 months. Don’t forget, a credit card balance of as ‘little’ as $6,000 can take more than 40 years to pay off if only the minimum payments are made.)

A lot of credit card debt, of course, has in the last few years been shifted over to lower-interest lines of credit, usually unsecured. This Peter/Paul conundrum is interesting: we very often see examples where people have paid off their credit cards using available lines of credit, only to have their credit card balances swell back to where they were within a year or so.

Let me share a scenario of someone who is self employed, as it highlights how a debt problem can spiral out of control quickly. I met recently with a woman in her 50s who owns her own company that furnishes and decorates high-end businesses, like big law firms. Or at least it did. With big firms shrinking to meet reduced market demands and trimming costs, her business had dried up.

Her accountant brought her to me, and it was clear she had severely mismanaged her business and financial affairs, despite her accountant’s warnings. We see this all the time—small business owners are typically very good at what they do, but very poor at handling day-to-day administration.

Here are some specifics that show how misaligned her lifestyle and business expenses were with the actual cash she was earning:

• Owns a townhouse: mortgage $600,000, estimated value $650,000

• Mortgage payments: $3,600/mo

• CRA lien against house for personal income tax owing: $98,000

• She had previously refinanced her house to help fund her business

• She had a prior bankruptcy 15 yrs ago—discharged

• Leased car: $51,000 owing

• Credit card debt: $75,000

• Business loan (personally guaranteed with a high interest rate): $45,000

• Outstanding debts to suppliers: $80,000

• Business rent owing (seven months behind): $11,000

• Net self-employment income: $3,500 per month, or $42,000 per year

The CRA lien is the big problem here. She can’t sell or refinance her house with the existing lien unless she pays her back taxes, while in the meantime interest charges and penalties pile up.

Although this may seem hopeless, it is actually a straightforward personal bankruptcy scenario: She closes the business, any source deduction or HST owing is included in the personal bankruptcy filing, as are any personally guaranteed business debts. She walks away from her house and cannot be sued for any shortfall due to the creditor protection afforded by her bankruptcy. She will lose her house and business, but that almost certainly would have happened regardless.

I should point out that clients in this type of situation often insist on keeping their house, a reflection of the deep-seated Canadian devotion to home ownership, and it takes long and difficult conversations with family, friends and trusted advisors before they come around to the realization that they have to let go of their home.

Keep in mind that the above situation is very normal for us. This is something we see every week.

As stated earlier, the most troubling trend we see now is the flood of regular Canadians facing financial crisis. Households and individuals who are employed, have decent incomes, own homes and have done everything they feel they ‘should’ be doing now find themselves facing serious, if not insurmountable, debt problems. They are having to file insolvencies now, or will in the next few years.

There are possible alternatives to outright bankruptcy, of course. Often, if clients have serious debt problems but also decent incomes, they will attempt a consumer proposal to settle their debt legally through a licensed trustee. In effect, creditors agree to accept just a portion of what they’re owed (which is more than they might get if someone is forced into a personal bankruptcy situation). This allows people to keep their assets (house, vehicles, investments, cottage, etc.) while eliminating unsecured debt they would otherwise have little chance to pay off in the normal course of life. The credit impact in a proposal is easier than a bankruptcy, and one can rebuild credit in a few short years. It’s a growing option for debtors. In fact, about 50,000 Canadians file proposals every year, and that number is rising.

Increasingly, life has simply become too unaffordable for many. The temptation to spend is too great, and access to cheap debt too easy. When the gap between what people need or want, and what they can afford with their incomes becomes too great, credit is used to fill the gap. Interest kicks in, and the cycle begins. As credit card debt is shifted to readily available lines of credit, $5,000 becomes $15,000, and soon you’re facing a $50,000 or $100,000 debt problem. A person living at or below the median income range simply cannot handle this.

Unfortunately, that’s a lot more ‘normal’ than you think.

Source: MacLeans – Scott Terrio is an estate administrator at Cooper & Co. Ltd, a licensed insolvency trustee in Toronto. Follow him on Twitter at @CooperTrustee

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Jun 15 2017
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debt management, HELOC, personal debt, Uncategorized

Why consumers should be wary of using the wildly popular home equity lines of credit as ATMs

A federal agency is warning consumers addicted to home equity lines of credit — a product increasingly driving debt —  could find themselves at increased risk of default if the housing market corrects.

“Falling housing prices may constrain HELOC borrowers’ access to credit, forcing them to curtail spending, which could in turn negatively affect the economy,” the Financial Consumer Agency of Canada wrote in a 15-page report out Wednesday. “Furthermore, during a severe and prolonged market correction, lenders may revise HELOC limits downward or call in loans.”

The timing of the release from FCAC is coincidental but it comes just two days after the Toronto Real Estate Board reported new data that clearly show the housing market in retreat. May sales dropped 20.3 per cent from a year ago and prices were off 6.2 per cent from April amid a massive surge of active listings.

The report, titled Home Equity Lines of Credit: Market Trends and Consumer Issues, focuses on the massive explosion of the HELOC market which grew from about $35 billion in 2000 to $186 billion by 2010 for an average annual growth rate of 20 per cent.

During that period, HELOC became the fastest growing segment of non-mortgage consumer debt. In 2000, the HELOC market made up just 10 per cent of non-mortgage consumer debt but had climbed to 40 per cent by 2010.

“At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households. HELOCs may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford,” said Lucie Tedesco, commissioner of the FCAC. “Consumers carrying high levels of debt are more vulnerable to the impact of an unforeseen event or economic shock.”

The average annual growth of the HELOC market slowed to five per cent from 2011 to 2013 and has averaged two per cent since, the slowdown at least partially attributable to tougher federal guidelines on how much home equity consumers can access through a HELOC.

HELOC products have become popular because they work like credit cards or unsecured lines of credit, in terms of the ability to draw money from them. They are usually backed by a collateral charge on your home but a HELOC most often gives the consumer the ability to withdraw and pay off their HELOC with flexibility — financed at a rate which is usually close to the prime lending rate at most banks.

Unlike a mortgage, a HELOC is a demand loan, and while most borrowers can pay interest-only on them, the loans are callable by the bank at any moment — a practice rarely seen in the Canadian market at this time.

A positive feature of a HELOC is the ability to consolidate high-interest debt from items like credit cards, and the report says from 1999-2010, 26 per cent of loans were used for just that. Another 34 per cent were used for financial and non-financial investment. The remaining 40 per cent was used for consumption or home renovation — a market Altus Group said was worth $71.4 billion in 2016.

The federal agency noted that most HELOC products sold today are part of what is called readvanceable mortgage. In those cases a HELOC is combined with the mortgage and as the mortgage is paid down, the available credit in  HELOC increases.

“In recent years, lenders have been strongly encouraging consumers to use readvanceable mortgages to finance their new homes,” said Tedesco.

She said complaints have shown people are not understanding the product. “It’s not that they’ve been bamboozled,” said Tedesco. “One of the things that we will be doing with the results of our research is trying to see how we can improve the disclosure around readvanceable mortgages, and will communicate to the financial institutions our expectations on that front.”

Source: Financial Post – Garry Marr | June 7, 2017

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Feb 02 2017
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credit crisis, credit issues, credit proposals, debt consolidation, debt management, personal debt, Uncategorized

When your mortgage is more than you can handle

On paper, you could afford your mortgage. Your lender even approved the paperwork. But now that you’re settled in your home, maybe you’ve incurred some unplanned-for monthly expenses, such as higher-than-planned utility bills, property taxes that have risen (as they tend to do), or increased insurance premiums, and find that you’re unable to make your mortgage payments. If you’re not sure what to do, the first thing is not to panic. All hope isn’t lost, and you don’t have to let your home own you. You do, however, have to confront the issue head-on in order not to lose control of your finances.

If you think your mortgage is too big, here are some options and avenues to consider going forward.

  1. Budget
The first solution is the most obvious: Cut back on other expenses to try and make up for the shortfall. If you got a mortgage without properly budgeting, then it’s better late than ever. Be honest with yourself and keep track of everything you spend for one month – or even better, categorize all of your spending that took place last month so you can get a jump-start on the process. Quicken, Mint, and YNAB (you need a budget) are popular tools for tracking your spending and creating a budget. By tweaking your lifestyle and spending habits, you might be able to close the gap between the amount of money that you need for your mortgage and housing-related expenses and how much you’re spending elsewhere.

 

  1. Refinance
Refinancing is when you go back to your lender (or a new lender) and renegotiate your mortgage contract, based on your current balance and the current interest rates, before your mortgage term has expired. Note that if you refinance, you’re almost certainly going to end up paying a penalty for breaking your mortgage contract, even if you stay with the same lender. But the upside is that if you refinance at a lower interest rate than the one that’s currently being applied to your mortgage, then you can save money on your monthly payments. Another option would be switching from a fixed rate to a variable rate mortgage during a refinance, since variable rate mortgages tend to have lower interest rates than fixed mortgages. But since the interest rate on your mortgages fluctuates with the market rate, this tactic could also end up backfiring on you if interest rates go up; you’ll be forced to pay the higher interest rate and payments could end up being higher than you were previously paying. Refinancing can also be used as a tool in conjunction with budgeting, so that you withdraw some of the equity in your home to consolidate and get on top of your debt while better managing your cash flow going forward.
  1. Sell, sell, sell
It is always an option to sell your house and get a smaller one. While selling your home and pocketing the profit may seem like a good idea, the profits might not be as big as you’d expect. Between land transfer taxes, the penalty of breaking the mortgage, fees for real estate agents, and other selling expenses such as staging and/or making small repairs, you may find that your profits will be eaten into at such an extent that you can’t sell your house while generating enough cash to pay off the mortgage. Reasearching your housing market and having a frank conversation with a realtor when it comes to how much you could realistically expect to get for your home will be a big factor in determining whether or not you should sell, as well as using online calculators so that you know how much those other incidentals will impact your bottom line.

 

  1. Rent it out
Renting often gets a bad rap as the doomed fate of the poor, the irresponsible, or the nomadic. But the thing is, it’s a fiscally responsible option for many people. If your housing market isn’t favouring sellers, or you aren’t getting any response to your house being on the market, considering whether it may be an option to rent your property to a tenant and live in a less costly option, whether that be smaller or located in a less desirable area. The sale and rental markets are related, so what’s happening in one will impact the other. If your area is experiencing a slow housing market and fewer people are buying homes for whatever reason, then there may be more people who are renting, or open to the idea. Ideally, your income from the rental will cover the costs associated with your home, and all you’ll have to pay for is your new rent, which you would find at an amount that you could actually afford.
  1. Get a private loan
This is not a fail-safe option and the private lending space isn’t for undisciplined borrowers. That being said, if you have a plan, a private loan can be a good way to consolidate other high-interest debt that could free up some money that could go toward your mortgage payment if you’re suffering from a temporary setback such as making ends meet during a period where you had a loss of income, or went through a divorce.
  1. Talk to your mortgage broker
It’s all about knowing your options in this situation, and whether you want to refinance your mortgage, switch lenders, sell your home, you need to know exactly what each option is going to mean in terms of your current mortgage, which means you need to know how much the penalty is going to end up costing you in the long run. Remember, talking to your broker is free, and even though they’re not a financial planner or advisor, they can advise you as to what loans and mortgages would work best for you in your current situation.

Whatever you decide to do, you do have options. They may not always be the best options, but there are ways for you to get your head above water, even if your mortgage is too big for you. If anything, once you get on top of your situation or the next time you buy a house, you’ll know better how to anticipate your true expenses and budget for them going ahead.

Source: WhichMortgage.ca By Kimberly Greene | this page was last updated on the 25 Jan 2017

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Dec 14 2016
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credit crisis, credit issues, credit management, debt consolidation, debt management, personal debt, senior debt, Uncategorized

Nearly half of homeowners unprepared for job loss or other emergency

The poll released today by Manulife Bank finds that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent have not put away any funds and nine per cent have access to $1,000 or less. (GETTY IMAGES)

An emergency fund is meant to be there in times of need, but a new survey suggests nearly half of Canadian homeowners would be ill prepared for a personal financial dilemma such as job loss.

The poll released Thursday by Manulife Bank found that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent admit to not putting away any funds and nine per cent only have access to $1,000 or less.

The remainder of those surveyed have up to $10,000 saved, with the average amount being $5,000.

Manulife Bank chief executive Rick Lunny says not having three to six months of expenses set aside can lead to desperation if a situation arises where you need to access money right away.

“The risk here is when they don’t have that money, and an unexpected event happens like you need a new furnace or a car repair, many of these people don’t have a choice but to lean on high interest cards,” he said.

Lunny noted that instead of taking advantage of the current low-interest rate environment to save money, the poll suggests that many homeowners are using it to buy more expensive homes.

“They’ve taken on large mortgages and as a result of that, they’re stretched in many ways,” he said. “Because of that, maybe they haven’t had the financial discipline to put aside rainy day money.”

Manulife says among those polled, homeowners had an average of $174,000 in mortgage debt, with an average of 28 per cent of their net income going toward paying off their home each month.

About half (46 per cent) of those polled say they would have difficulty making their monthly mortgage payments in six months or less if their household’s primary income earner lost his or her job.

Sixteen per cent say they would have financial difficulty if interest rates cause their mortgage payments to increase.

Mortgage data has been a hot-button topic in recent months as the federal government takes steps toward reducing the risks in the Canadian housing market, particularly in major cities like Toronto and Vancouver.

Earlier this month, Finance Minister Bill Morneau announced that stress tests will be required for all insured mortgages to ensure that borrowers would still be able to make their mortgage payments if interest rates rise or their financial situations change.

Last year, Ottawa raised the minimum down payment on the portion of a home worth over $500,000 to 10 per cent.

Lunny applauded the changes but says it doesn’t change the financial situation of current homeowners, who may already find it difficult to make mortgage payments.

The poll by Environics Research was conducted online with 2,372 Canadian homeowners from June 28 and July 8 of this year. Survey participants were between the ages of 20 to 69 with household income of $50,000 or more.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.

Source: LINDA NGUYENTORONTO — The Canadian Press Published Thursday, Nov. 24, 2016 

The poll released today by Manulife Bank finds that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent have not put away any funds and nine per cent have access to $1,000 or less. (GETTY IMAGES)

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Apr 19 2016
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debt consolidation, debt management, personal debt, senior debt, Uncategorized

Not All Debt is Bad

Not All Debt is Bad

Not all debt is bad. When you distinguish between credit used to fund the purchase of something that will increase your wealth and debit created for disposable items, you are empowering yourself to make informed financial decisions.

Why is referring to credit use as “bad” keeping you locked in debt? Judgments like this will translate back to yourself and you will end up feeling like you are a bad person with no discipline or self-control. This sort of language and self-talk will end up creating a self-fulfilling prophecy – unless you can learn to turn your view around and use the debt as an opportunity to reflect on past expenditures you have made.

Things to consider are:

  1. Why was the expenditure made?
  2. How much was spent?
  3. Over what time period were the expenditures made?
  4. What can you do about it?

 

And, at the same time, always show gratitude for all the enjoyment you have received from the items and experiences that were purchased on credit and have created the debt. Look for ways to turn the debt into credit that will up your financial position.

For more information on debt solutions, contact the Ray C. McMillan Mortgage Team

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Mar 30 2016
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credit crisis, credit issues, debt consolidation, debt management, personal debt, senior debt, Uncategorized

Should You Sell Your Home to Pay Off Debt?

for-sale-sign-house-home

Home prices have literally gone through the roof in Canada in recent years. If you’re lucky enough to have entered the market a few years ago, you’ve built up some equity. But what if you have other, not so good debts, like credit cards, overdrafts and tapped out lines of credit? How should you use the equity in your home to deal with this debt?

If you do have equity in your home, you have three potential options to pay off excess unsecured debt:

  • Sell your home, cash in the equity and pay off your debt.
  • Use the equity in your house to support a debt consolidation loan to amalgamate multiple old debts into one new, hopefully lower cost, debt.
  • Depending on how severe your debts are, consider something called a consumer proposal.

Each alternative comes with its own pros and cons and choosing the best alternative means doing a cost-benefit comparison based on your individual situation. Let’s look at some of the considerations.

Can you afford to maintain your home?

The very first step is reviewing your budget to see if you can afford the ongoing costs of keeping your house. If your unsecured debts came about because of other spending problems or you were out of work temporarily, but things have returned to normal and you expect you can now keep up with your mortgage payments, selling your home may not be the best option.

If, however, your home is one of the main reasons your budget is now out of balance, perhaps because your income was permanently reduced due to retirement or a job change, then you need to make the hard decision to sell and downsize. Dealing with old debts, while continuing to pile on more to make ends meet each month, doesn’t make long-term sense.

Will you realize enough to pay off all your debts?

Let’s assume you can afford to keep your home. The next question becomes should you sell anyway in order to pay off your other debts and effectively start over? This may only make sense if you truly are able to begin again without any other unwanted debt.

If you owe $50,000 in credit card debt and only have $35,000 equity in your home, selling your home won’t solve all your problems. Once again, you need to look at your budget and decide if selling your home and relocating (you have to live somewhere) will save enough that you’ll be able to repay the additional $15,000 you owe in a reasonable period of time.

Interestingly, this is the same analysis you need to make when considering a debt consolidation loan. If taking out asecond mortgage on your home doesn’t consolidate all of your existing unsecured debts and balance your budget, then it might not be the best choice.

Are your debts too large to deal with on your own?

Finally, if selling your home (or taking out a debt consolidation loan) won’t cover all of your debts, and repaying the excess will take too long, then it’s time to consider options that will help you eliminate all of your debts now.

If you have equity in your home, a consumer proposal filed with a bankruptcy trustee is a way to use that equity to negotiate a settlement agreement with your creditors. In a consumer proposal, you’ll end up paying less than you owe, yet all of your unsecured debts are eliminated.

So in our original scenario you may be able to negotiate a payment plan with your creditors to pay them $35,000 to $40,000 and walk away from $50,000 in debt. In a consumer proposal, you can keep your house if you decide you can afford to or you can sell your home and make a lump sum settlement offer. The point is, your debts are eliminated no matter how much equity you have. So if you owe more than the equity in your home, this is a great option to consider.

The best approach is to talk with a professional such as a bankruptcy trustee. They can help you review the numbers and choose the right solution for you.

 

Source: RateHub.ca by Doug Hoyes November 13, 2015

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Mar 23 2016
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baby boomers, debt consolidation, debt management, personal debt, senior debt, Uncategorized

Retiring with a mortgage? Why you might want to think twice about that

When it comes to opining on seniors carrying debt into retirement, I’ll state upfront my personal bias that anyone with credit-card debt — or even mortgage debt — has no business fantasizing about retirement. To me, it’s simple: if you have debt of any kind, you keep working until it’s all discharged. As I have written elsewhere, I believe the foundation of financial independence is a paid-for home.

That said, I recognize there’s a large segment of the population not fortunate enough to have a paid-for home, corporate pensions or financial assets like RRSPs and TFSAs. I personally know seniors who still rent and have no financial safety net. Some may have to resort to payday loans just to get by until the next month’s government-issued Canada Pension Plan, Old Age Security or Guaranteed Income Supplement cheques arrive.

Doug Hoyes, president of Kitchener-based bankruptcy trustees Hoyes Michalos & Associates Inc., profiles senior debtors every two years in his Joe Debtor study. The data are shocking. He defines seniors as 60 or older, so many are baby boomers either in retirement or on the cusp of it. (The oldest boomers, born in 1946, are now 70, while the youngest boomers, born in 1964, are 52 and presumably still working full-time.)

Senior debtors make up 10 per cent of Hoyes’ 2015 study, up from eight per cent four years ago and owe an average of $69,031 in unsecured debt, higher than any other age group. Nine per cent borrow against their income — often pension income — by resorting to payday loans.

Payday loans are, in my opinion, almost usury — defined as debt instruments charging more than 60 per cent in interest a year. However, because the loans are only a few weeks in length (literally, until the next payday), the lenders can charge up to $21 for every $100 borrowed in Ontario, which if paid over a year would be interest of 546 per cent, Hoyes says.

Fifty three per cent of these senior debtors live alone and often cite illness or injury as a cause of their financial troubles. Among bankrupt seniors, nine per cent had payday loans. In some cases, their adult children are making financial demands and they’re too embarrassed to admit they have few alternative resources.

At the other extreme are the fortunate, wealthy boomers with paid-for homes, large defined-benefit pensions and maxed-out registered and even non-registered (taxable) investments. For them, says Emeritus Retirement Solutions president Doug Dahmer, the biggest expense will be tax, something that must be planned for well in advance. In this case, borrowing may turn out to be tax efficient.

Then there are the rest of us: perhaps with no large company pensions, modest financial assets and a home with only some equity in it, which may be a tempting source of future funds in retirement or semi-retirement.

This middle group is often torn between paying down the mortgage before retiring, or capitalizing on low interest rates to take a chance on building their financial nest eggs in the stock market.

Last July a CIBC poll found that, on average, Canadians expect to be debt free by age 56, although some are indebted well into their sixties. Even in the 45-plus cohort, more than 68 per cent are in debt, including 31 per cent who still have mortgages. In 2013, CIBC found 59 per cent of retirees were in debt.

But this may not be necessarily a bad thing, argues CIBC Wealth tax guru, Jamie Golombek. “There’s no harm in having debt if it’s for an appreciating asset. If you’re in your home for the long term and borrowing at low interest rates, it’s not a big problem. The problem is when you run out of cash flow to service the debt.”

Interest rates are near 60-year lows: posted five-year mortgage rates are under three per cent at most financial institutions (and under four per cent for 10 years). Of course, unless you lock in, there’s no guarantee rates won’t rise to more uncomfortable levels.

In a paper he wrote for CIBC last year (Mortgages or Margaritas), Golombek suggested the zeal to pay down debt could put some people’s retirements at risk. It was written in response to another CIBC poll that found 72 per cent of Canadians prefer debt repayment over saving for retirement. He found that if you can get 6 per cent annual returns in a balanced portfolio of investments, the net benefit was almost double that of paying down debt.

Back in 2012, BMO Financial Group tackled the same issue, noting that rising home prices meant real estate formed a disproportionate amount of couples’ net worths. This tempts some to tap into their home equity in retirement in order to overcome their past failure to save. As boomers become net sellers of homes instead of driving up prices, BMO said home prices could fall by one per cent per year. Downsizing, renting or moving to a small town are all ways to access some of the equity in your home.

Still, Hoyes has seen enough senior debt to argue against taking on more. “Low interest rates are great as long as you can make payments, but what if you lose your job, get sick or divorce? The fact moderate interest rates are only three per cent is irrelevant if there’s no money coming in. When your income becomes fixed, your expenses have to become fixed, but it’s hard: you can’t control the price of gas or car insurance.”

Personally, I like to have enough Findependence that you reach what Dahmer terms the “Work optional” stage. It’s about being in control of your days, Hoyes says, “If you have debt when you retire you are not in control of your day.”

And of course, medical expenses can creep up. It’s not as bad here as in the United States, where medical costs can have catastrophic consequences, but “In Canada medical expenses are insidious,” Hoyes says, “It’s a lesser amount, but creeps away and boomers are more likely to get whacked.”

One option, if available, is to work part-time in retirement. An analysis by Toronto-based ETF Capital Management found that if a retiree earns just $1,000 a month extra in consulting income or a part-time job, a nest egg’s depletion slows dramatically. For couples, if both partners earn that much, the financial picture is rosier still.

This may or may not be “optional” work. BMO found 29 per cent of Canadians expect to delay retirement and work part-time in retirement because of savings shortfalls. For them, BMO says, tapping home equity constitutes “Plan B,” one that 41 per cent of Canadians are considering.

But avoid reverse mortgages, Dahmer counsels. He says it’s more cost efficient to use a secured line of credit against the house. Draw funds only if needed, but set it up while you’re still working and the bank thinks you’re a good credit risk.

Dahmer thinks flexible use of debt through a line of credit is a sound strategy for smoothing spending in peak years, especially if your main income is from registered assets. “You’re far better off paying 2.5 to 3.5 per cent in interest for a few years than forcing yourself from a 33 per cent to 42 per cent marginal tax bracket, not to mention Old Age Security being clawed back.”

The savings can be in the hundreds of thousands: “Retirement is the one time in life that strategic tax planning can make a significant difference. That’s because of the many different places you can source cash flow from, each with its own distinctive tax implications.”

Source : Financial Post Jonathan Chevreau | March 22, 2016 | Last Updated: Mar 23 6:56 AM ET

Jonathan Chevreau is the founder of the Financial Independence Hub 

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