Op-ed: Homing in on debt solutions

Consumer columnist Michael Prentice says seniors looking to cut their debt loads should consider using their houses as leverage
Debt

We occasionally hear sob stories about senior citizens being at risk of losing their homes because they cannot afford to pay property taxes, which now are about $4,000 a year on the average Ottawa home.

Give me a break. These people – typically owning a home worth $400,000 – have difficulty paying one per cent each year in property tax? True, many are retired and living on incomes that are well below what they earned while working. But I bet many of them paid off their mortgage long ago.

Let them borrow a little of the equity they have built up in their home to pay their property taxes and, if necessary, household bills such as electricity, gas and water.

Hard-hearted? I don’t think so. Full disclosure: I retired more than a decade ago and am still paying off a loan I took out to purchase my present home.

I got to thinking about this on a recent vacation in British Columbia, where I learned that home owners aged 55 and over are entitled to a ludicrously generous break on their property taxes. The B.C. government permits them to defer payment of property tax for as long as they own the home.

These lucky homeowners must eventually pay the property tax, plus a little interest, when they sell. The interest rate is pegged at a maximum of two percentage points below prime borrowing rates. Recently, this interest rate has been slightly less than one per cent a year.

To me, it seems a flagrant case of a government bribing people with other people’s money. In this case, B.C. homeowners aged at least 55 are being subsidized by the rest of the population. That would include a majority of British Columbians who will NEVER be able to afford their own home, especially with astronomical real estate prices in the Vancouver area.

‘It isn’t fair’

After learning of this B.C. tax break, I did a little research and found this quote from a Vancouver real estate agent: “When you think about it, it is absurd … It isn’t fair, but it’s a program that the (B.C.) government offers, and I think people would be foolish not to take advantage of it.”

In Ontario, people of advancing years must be more creative if they want to stay in their homes.

According to a recent study, the average Canadian aged 65 and over has debts totalling almost $16,000 – and that does not include any mortgage debt. Still, elderly Canadians generally manage their debt well, according to debt-rating agency Equifax, which conducted the study.

I thought I was handling my debt as well as possible until I got a tip several years ago from a friendly employee of the branch where I usually do my banking. He suggested I should gradually move my mortgage over to a home-equity line of credit.

It took several years to complete this. The result is that my monthly home-loan payments are now about half what they were when I had a mortgage. It took a while to get into my thick head why this is so. The explanation: By switching to a line of credit, I have extended the repayment period, thus greatly lowering the monthly payments.

For seniors who own a home and want to stay there, there is also the option of a reverse mortgage. With this, the homeowner receives a monthly sum, and makes no payments of principal or interest until the home is sold. But my advice is look hard before leaping into this. Two key questions: is the interest rate higher than with a mortgage or home-equity line of credit? And how much must be paid in fees?

For many homeowners, the goal is to own their home 100 per cent. No mortgage! Yippee! Yet a mortgage or a home-equity line of credit is the cheapest loan one can possibly find.

Most credit card issuers charge a shocking annual interest rate of 20 per cent, or even more, for customers who fail to pay their credit card bill in full and on time. What seems most unfair about this is that interest is charged on the entire amount spent on the card, even though the customer makes a partial payment before the payment deadline. I make it a rule to never, ever run a balance on my credit cards beyond the due date for payment in full.

My advice to anyone who has difficulty paying credit card bills in full and on time: Seek a line of credit at the bank. Pay off the credit card debt from the line of credit. And smarten up.

Michael Prentice is OBJ’s columnist on retail and consumer issues. He can be contacted at news@obj.ca.