Your debt could be the answer to obtaining the lifestyle you want.
You've heard it before: there's good debt and there's bad debt.
Bad debt—like credit card bills filled with superfluous purchases—plagues much of the country, as the high interest rates and costs to users who don't pay them off quickly begin to add up. But good debt, when paired with smart financial tools, can bring you closer than ever to creating a fiscally sound lifestyle all the way through to retirement.
Good debt is defined as capital borrowed for assets that appreciate. Mortgages, education and home renovations—or even travel, according to some—are ventures that, in most cases, could increase in value and benefit the investor within a set amount of time. The trick to keeping debt in good standing is, of course, paying it off in a timely manner. But, there are ways to make your good debt work for you. Especially in the years approaching and during retirement when income levels drop, your debt could be the answer to maintaining or obtaining the lifestyle you've worked so hard for.
Here are three things you can do to use debt to your advantage:
1. Stay in your home longer.
Home equity is the silver lining of the mortgage debt cloud and quite often supplies the largest chunk of change you will have access to later in life. How to best leverage your home equity should be determined by a number of factors, including how much of your home is paid for and what kind of cash savings you have. A reverse mortgage is one way to access money from your home, but it may require hefty fees and carry unavoidable penalties. A lower cost option is to have a home equity line of credit for cash emergencies or to provide a steady flow of income that allows "house-rich" seniors to become "cash-rich" too.
Another benefit is the longer you stay in your home, the more appreciation value you will reap. Recessions aside, this rings true for most of the modern-day housing market. Maintaining a healthy relationship with your mortgage throughout its lifespan may require refinancing or adopting new innovative mortgage programs like Manulife One, which provides an all-in-one flexible account that brings together your mortgage, line of credit, savings and income to provide users with a variety of financial benefits. This calculator could help you navigate your way to a tax-free withdrawal that will give you the best of both worlds.
2. Offset taxable income.
Once you've decided on a home equity withdrawal strategy, the icing on the cake is that unlike other sources of income, this money is tax-free. You can use this as you wish to pay off other bad debt (like credit card bills), handle unexpected expenses, help your family members build their lives (such as pitching in for post-secondary education) and even maintain or improve your day-to-day standard of living. Who knew that income without tax could exist with almost no strings attached?
3. Get lower borrowing rates by consolidating all your debt.
Borrowing against your home equity could end up saving you more money (and time) in the long run. Accessing the equity in your account becomes as easy as writing a cheque to put toward things like a home remodel, investment or paying off student loans. Or consolidate them under one low interest rate, which is often lower than it would be for some of the higher interest debts. Plus, there's no need to apply, get permission or secure additional funds over the years. The flexibility of the Manulife One program allows you to combine your banking products so you can pay down your borrowings on your own terms. It also allows you to use your own income to reduce your borrowing and interest costs — effectively streamlining your entire banking process.
No matter what your current financial situation may be, you can make your debt work for you. By using tools such as the Manulife One account to manage both good and bad debt, you'll be well on your way to a healthy financial future.