A mortgage-free home is the cornerstone of any solid retirement plan. Indeed, decades ago it would have been considered a major financial sin to carry a mortgage into retirement. But times are changing. The proportion of seniors with mortgage debt has almost doubled from 8% to 14% (from 1999 – 2016). Seniors also have the highest rate of mortgage delinquency.
What’s going on here?
Carrying a Mortgage Into Retirement
As you prepare for retirement, one useful financial planning hack is to match your mortgage amortization with your retirement date so that you can retire with a clean balance sheet, so to speak. This is especially helpful for those who bought a home (or upgraded their home) later in their career, when a typical 25-year amortization wouldn’t see the mortgage paid off until well beyond retirement age.
But I’ve had several clients in my fee-only financial planning practice ask me about carrying a mortgage balance into retirement. They wonder if it makes sense to pay off the mortgage faster when interest rates are at record lows (some had mortgage rates below 2%). Wouldn’t that money be put to better use investing in a diversified portfolio of ETFs – particularly if there’s still unused RRSP contribution room?
To be fair, carrying a mortgage balance into retirement isn’t necessarily a bad thing, if done with well thought out reasons (like prioritizing investments in a low interest rate environment). But this assumes you have the available cash flow to top-up your mortgage or your investments. It also assumes your retirement outcome doesn’t hinge on having a paid-off home and that you’ll have sufficient sources of income to pay your bills.
There’s plenty of evidence to suggest that’s not the case for many seniors today. A Statistics Canada study showed that working seniors were more likely to have debt than non-working seniors, which suggests they might be staying in the workforce longer in order to pay off debt.
Senior immigrant families had twice as much debt as Canadian-born families (but 1.5x more assets). Single seniors had lower debt and asset levels than couples and other family types.
Alarmingly, those aged 55-74+ were the only age group that posted an increase in the number of mortgages held versus last year:
Growth of Mortgage Debt in Retirement
I reached out to mortgage expert Rob McLister of Rates.ca for his thoughts on the growing trend of mortgage debt in retirement. He said that carrying a mortgage or HELOC balance into retirement is obviously not something most seniors aspire to do.
“With shelter prices consistently exceeding income gains, poor retirement planning and incessant cost of living increases, it’s a growing reality, said Mr. McLister.”
There’s also a greater propensity for parents to help their kids get into the housing market, with nearly half of millennial homebuyers getting financial help from the bank of mom & dad.
Mr. McLister says that parents who don’t have 20+ years of retirement savings banked should think very carefully about how much they gift their kids.
“It worries me that people are relying so much on home equity to survive their golden years.”
There’s also the notion that surging home values (especially in Toronto and Vancouver) give people the illusion that they don’t need to save as much, which Mr. McLister says is almost guaranteed to be a problem for people who exceed the standard life expectancy.
Home prices may not beat inflation for long periods of time in the future, and depending on where you live in Canada may not have kept up with inflation over the past 10 years.
The run-up in house prices has fuelled the growth of another trend – reverse mortgages. These products, once considered a last resort for retirees, are now growing at 3-4 times the year-over-year growth of regular mortgages. It’s driven partly from the fact that many seniors have very little in terms of savings and investments, instead relying on rising home equity prices to increase their net worth.
The trouble is you need to live somewhere, and so unlocking your home equity becomes a major challenge if you don’t want to downsize or sell your home and rent in retirement.
Mr. McLister says the reverse mortgage market growth has been driven mainly by plunging interest rates, growing senior debt loads, more aggressive marketing, and increasing acceptance of “equity release” (that’s what they call it now) as a retirement planning strategy.
Note that if you have to borrow and can qualify, the lowest-cost option for extra cashflow in retirement is a HELOC at prime to prime + 0.60%. With this option you can pay up to 40% less interest over 10 years, but you’re making monthly interest payments the whole time.
Pitfalls to Avoid in Retirement
Given this growing reality of seniors carrying debt into retirement, I asked Mr. McLister to share some tips around using a HELOC.
Tips if you get a HELOC as a retirement safety net:
- Keep the limit at 75-80% of what you’d qualify for with a reverse mortgage. That way, worst case, you can pay off the HELOC with a reverse mortgage to eliminate the monthly interest payments.
- Apply for a HELOC before you retire when your income is higher
- Monthly interest payments can ding your cashflow so many seniors with HELOCs borrow off the HELOC to pay the interest (i.e. capitalize the interest).
- If you’re going to do this, deposit your paycheque into the HELOC and use it as your chequing account. That way the lender see you’re still making regular principal payments and not just racking up debt. The Manulife One is easily the best of breed for this purpose but I’d suggest trying to negotiate the prime + 0.60% HELOC rate.
It’s tough to pinpoint exactly why so many seniors are carrying mortgage debt into retirement. One reason is that interest rates have been extremely low for a long time and so perhaps many seniors have prioritized investing over paying off their mortgage. As long as they have enough income to cover their monthly payments then everything should be fine and the mortgage will be paid off, eventually.
More troubling, though, is the increasing level of indebtedness – either from excessive borrowing or from a home purchase later in life where the amortization schedule doesn’t line up with a typical retirement age. This forces more seniors to work past age 65 in order to make their monthly payments. Not ideal.
I’ve made a conscious choice to prioritize my RRSP, TFSA, and even non-registered investments before I start aggressively paying off my mortgage. But I’m 41 and still in the accumulation phase. I prefer to invest now rather than pay off my 1.45% mortgage debt.
That’s me, though. Many of my clients focused on paying off their mortgage and tell me they’re glad they did. More than just numbers on a spreadsheet, it’s the psychological effect of being debt-free that increases happiness. It’s something I’ll keep in mind as I inch closer to early retirement.
What are your thoughts on carrying a mortgage into retirement: Cardinal sin, or new reality?