The Risk Of Carrying A Mortgage Into Retirement
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?
Related: Boosting Retirement Savings During Your Final Working Years
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.
Final Thoughts
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?
I will be mortgage free on my primary residence – for me its the comfort and feeling of safety. I have been able to get my RRSP and TSFA caught up so have been going hammer and tongs at my mortgage.
I recently withdrew equity out of my condo to buy a another home. The condo is now going to be a rental. I am not as concerned about it being mortgage free by the time I get to retirement – provided the rent covers the cost of the property.
I hear you on the feel – I just don’t think I’d be comfortable carrying debt of any real size into retirement but that is just my stomach lining talking.
Hi Pam, thanks for your comment. It’s interesting how we put our money into different buckets or compartments and that influences what we do and how we feel about it. It feels good to have your primary residence paid off, but it’s okay to have a mortgage on the rental property because the rent is directly tied to that bucket of money and feels safer.
Your primary mortgage is just a bill payment though, no different than rent. Now imagine your retirement income streams, many of which are guaranteed, paid for life, and indexed to inflation, are easily able to cover your payments. You’re the ‘renter’ of your primary residence, in this case, and your income streams are probably much safer than the rent coming into your income property.
Fair comment. I think there is every chance my rental mortgage will also be paid off by the time I retire I am just not going to focus on paying it off before I have my primary residence paid off. The interest on the rental is tax deductible so that is the trade off I am making.
I may also elect to sell the condo once the market recovers (if it ever does – man is Alberta hurting right now). But for the moment, someone else is covering all the costs and I can put effort into my primary residence and keeping up on my other investments.
I’m leaning towards a new reality. I’m 57 and mortgage free in a $1.5 million house. I only invest in VXC which yields a 1.54% dividend. I’ve been offered a $500k variable mortgage at 1.85%. The 1.54% dividend is tax efficient and I can write off the 1.85% mortgage cost as a investment expense I think so it’s close to a wash. I don’t plan on ever retiring as I’m happy working and think retiring is B.S. so I’m thinking about taking on a mortgage, probably less than $500k.
Hi Geoff, your situation is one of those ‘new realities’ where carrying a mortgage in retirement can make sense. You’re not struggling to pay off a house that you stretched into in your 50s. You’re making a calculated decision to invest. You’re working because you want to, not because you have to. In your case, the stigma of holding a mortgage in retirement doesn’t really apply.
We recently paid off our mortgage. I’ll admit, it is a great feeling, but I wasn’t on board at first. I preferred the idea of investing our money instead of paying off a low interest rate mortgage. Especially because we’re millennials and not close to retirement. Numbers-wise, one way might make more sense, but like you said, there’s the psychological component.
Hi Suchot, there’s definitely a psychological component to being debt free and also freeing up that extra cashflow every month to do … whatever with. I don’t know anyone who isn’t happy that they paid off their mortgage early.
I personally think it’s a no-no. Being in the field myself, I can argue the numbers either way but I think it boils down to peace of mind. Generally speaking, when you’re fully retired (i.e. not earning employment/self-employment income and living off of dividends, savings, etc) I hardly think you want to be saddled with the financial or psychological hassle of having a mortgage payment to contend with in addition to all the other expenses that comes with home ownership. I also think peace of mind would come from not having to worry about losing your home should you fall behind in payments. If taking a mortgage into retirement is unavoidable, or if you don’t want to downsize in order to eliminate the mortgage, you need to seriously consider working until it’s paid off (health permitting of course). Thanks for another great post Robb!
Caron, I’ll be honest – most of my clients who are nearing retirement with mortgage debt aren’t doing the math on whether it’s better to invest or pay down the mortgage. They simply haven’t matched up their amortization to their retirement date, either because they bought or upgraded their home later in their career, or they refinanced to pay off debt, or kept kicking the amortization down the road at renewal.
I’m in that group who will probably carry a mortgage into retirement. We had a lovely home with an ocean view in a small community that was mortgage free. Unfortunately when my husband retired he realized that there was not much for him to do so we moved to Victoria. We love it here but the housing prices are much higher. I am still working and paying off the mortgage as quickly as I can. I would like to retire in the next 5 years but it might not get fully paid off. Fortunately we have a small bachelor suite in the basement that helps me get in that extra equity payment every year.
Hi Lynda, thanks for your comment. You’re definitely not alone in the sense that your “downsize” ended up costing more than your existing home. I wouldn’t worry about not having the mortgage paid off right when you retire – if you have the means to cover your expenses, plus the extra income from the basement suite, then I’m sure you’ll be fine if you carry the mortgage for a little while into retirement.
I’d hate to work longer than I had to just to avoid the stigma of having a mortgage in retirement.
is there any risk in not being able to renew a mortgage after retirement? I know there’s more scrutiny when you don’t have employment income post retirement if you’re trying to get a new mortgage.
I don’t think you’d have any trouble renewing a mortgage with your existing lender, but you’d need to re-qualify if you tried to change lenders and that could be problematic without employment income.
I retired mortgage and dept free. Once the three children were educated and independent we were able to quickly eliminate debt and save hard for retirement. We were fortunate enough to buy a new motorhome and tow car and have it paid off as well.
If you have enough investments in non registered accounts I can see carrying a low interest mortgage. If the investments are all registered it won’t give you the flexibility to pay off the mortgage if interest rates start rising.
Hi Gail, that’s a great point and one that should be emphasized for those who choose investing over extra mortgage payments. My goal has always been to prioritize RRSP and TFSA contributions first before non-registered investing and mortgage extra payments. Non-registered gets the nod today due to low interest rates (and my longer time horizon), but that situation could easily change in the next few years if rates rise. In that case you’d have the choice to re-prioritize and direct future cashflow towards the mortgage, OR sell off some non-registered investments to pay down the debt even faster.
You don’t mention couples who divorce close to retirement and have to sell their home and split their assets. It definitely throws a wrench in having one’s mortgage paid off before retirement if you are starting over with home ownership in your fifties.
Our plan was always to enter retirement mortgage-free. We did not pay off our mortgage super fast, it took 20 years. But we had it paid off by ages 43 and 45. I think we found a good balance between saving for retirement and paying down the mortgage. And I definitely love the peace of mind it gives us.
Of all the clients our office assists, not a single one has ever regretted paying off their mortgage too soon. The pyschological effect has considerable value, in my opinion.
Hi Scott, I hear you loud and clear. As I said, it’s more than just math on a spreadsheet (which is comparing unknown future investment returns to a guaranteed return of paying down the mortgage).
The assumption made in general personal finance commentary that everyone’s life trajectory is the same (marriage, kids, home, stay married, pay off the mortgage, retire, etc.) is frustrating. Many lives are not like that – impacted by salary level, failed marriages, learning through life’s curveballs and mistakes. Single in my late 50s, I am making extra mortgage payments when I can and watching my spending, etc., but I will still have a mortgage into my 70s. I am already in a 700 sq ft condo, so no chance to downside. I’m not in work I love, so I would go insane if I delayed retirement to into my 70s. My current debate is whether to carry my mortgage into retirement, or sell and pay rent forever. Not a fun choice – I’d love to see some commentary on how to make that decision.
Hi Darlene, thanks for your honest feedback. It’s so hard to generalize these types of decisions as we’re all facing our own unique circumstances, challenges, and time lines. That’s one reason why I started my fee-only financial planning practice. I’d get so many emails from readers saying, “that was a great article but my situation is quite different and so how should I think about a particular issue?”
Good financial planning will take into account your own individual situation and then model a few different scenarios for you to consider.
Hi Darlene, I totally agree with your comment re the common assumption in financial planning that life unfolds as planned with immunity from life’s unpredictability. I find it incredibly frustrating and not based on reality for many of us.
I’d feel more comfortable to have no mortgage debt approaching retirement. People will need more money for the reverse HELOC to pay for in home care or retirement home care anyways, haha! 🙂
Great article Robb. I’m early retired and still carry mortgage and HELOC debt with no immediate plans to pay it off, they are just another bill. The key is generating enough secure cash flow to replace your income and pay the bills, including servicing the debt. My retirement income (Pension, CPP, RIFF, Dividends, occasional work) is approximately 85% of my working salaried income and is more secure, as Covid showed. Our choice was retire early and figure out if we could service the debt or work another 5-7 years and slay the debt. Easy choice.
We use a HELOC to help unlock some of the value in the house to pay bills, buy assets, play. At some point you have to do something with the asset. We do it now rather then wait until our knees no longer work.
We paid off our mortgage very aggressively and set up a HELOC. We used the HELOC to fund our investments. The mortgage interest was not deductible, but the HELOC interest from investing is. Some of the money from the HELOC was used as a down payment on a rental unit. We now have 3 rental units. We will be retiring as soon as we can pay off the mortgages on the 3 units. This will give us retirement income which is indexed to inflation. This works for us because we are capable of doing most repairs needed at the rental units and do not need to hire others to do these things for us. With the rental units, CPP and OAS, we will live comfortably. Had we not paid off the mortgage aggressively when we were young, none of the rest of our plan would have been possible.