Managing mortgage or retiring with debt

Max and Sarah are now typical of more than 50% of Australians their age – those between 55 and 64. That’s because they are carrying a hefty debt into their retirement. And they’re starting to feel concerned about the affect this will have on their ability to enjoy the ‘good life’ – or even an okay one – in retirement.

New research on retirement and debt has just been released. While it reveals a far from positive trajectory, it’s also not a reason to be alarmed. Here’s what the research tells us and why there’s no need to panic.

Mortgage debt and size by age

Professor of economics at Curtin University, Rachel Ong ViforJ has been measuring mortgage debt for many years. She first reported on this in 2002-03, using Australian Bureau of Statistics (ABS) Survey of Income and Housing data to extract a picture of the amount of mortgage debt different age groups are carrying.

In data recently published in Nine newspapers, (based upon an ABS data from the 2019-20 financial year) Ong-VijorJ found that:

  • 54% of 55-64 year olds have a mortgage (compared with 23% in 2002-3)
  • 13% of those older than 65 have a mortgage (compared with 4% in 2002-3)

In a previous report on the trend for mortgage debt to increase, the Curtin University authors cited three reasons:

  • ‘Real’ house prices have risen much more sharply than ‘real’ wages, so households have to borrow more to buy a home and take longer to pay it off.
  • Flexible mortgage products (usually called ‘equity access’ loans) allow householders to increase mortgages to pay for other items, thus increasing their debt. 
  • Older workers will expect to work longer than their parents’ generation and will have more super so they may be delaying paying down mortgages believing they have more time and the possibility of using a super payout.

What does this mean for you?

The reasons why average mortgages are higher in value and prevalence are probably not that relevant to individuals like Max and Sarah. If they are feeling anxious about their ability to pay down their debt and still draw a reasonable retirement income, then that is the issue they are focused on. 

What are your options?

If you have a mortgage and are close to retirement, it’s helpful to work through the following three-step process to review, reduce and reassess.

1. Review

If you have yet to retire then now is the time to decide the number of years you will continue to work full time. It really is time to get specific. In deciding this, you can start some serious retirement income forecasting. Reviewing your current household spending – e.g. are you living within your means – is critical. 

2. Reduce

If you are not living within your means, some serious budgeting is called for. Reviewing whether you can make higher mortgage repayments is also important. Say you will work for another five years, what if you reduced annual vacation spending and paid another $3000 per year off your mortgage, this would mean saving even more than this amount as your interest would also reduce. If your mortgage seems unsustainable, you might also start to explore whether you can actually afford to live in your current residence, or whether a downsize will ease the pressure all around.

3. Reassess

We’ve mentioned a couple of options to manage your mortgage, but there are many more. Understanding the wisdom of using a super lump sum (once you have reached Preservation Age) is useful. Retirement Essentials offers specific consultations for this option. There are also many equity access schemes whereby you could stay in your current home, but access some of the wealth in order to support your retirement lifestyle. One such option is the government’s Home Equity Access Scheme. There are also many companies which provide reverse mortgages for this reason.

Regardless of the size of your mortgage, it’s worth remembering that your home is arguably the most valuable asset you have in retirement. This means you have access to funding and options. There are many ways to manage this wealth to ensure it enhances your retirement  income as effectively as possible. Talk to our advisers if you are unsure about how to get started.

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Were you surprised by the proportion of retirees with mortgage debt?

If you’ve faced this challenge and managed it well, please tell us about your solution!