We imagine the typical Australian retiree has worked hard and paid off their house. But big numbers of Baby Boomers are now entering retirement with a mortgage.
An MLC report, "The Roof over Retirees’ Heads", notes that the proportion of homeowners who still have a mortgage at the point of retirement in 2016 surged 23 per cent in a decade to 36 per cent.
Generation X are also heading towards retirement with mortgage debt. “They [Gen X] have a huge amount of financial burden to be carrying into retirement,” says Curtin University’s Professor of Economics Rachel ViforJ.
The good news is that a variety of strategies are available to help manage housing debt in retirement.
Many factors have conspired to turn Gen X into generation debt. House prices have surged, wage growth has stalled and costs such as health insurance and childcare have increased.
“The reality is that low housing affordability and later workforce entry meant many Australians were locked out of the housing market,” explains Jason Marler, head of actuarial at MLC Wealth. “Instead, many [Gen X] are renting as they complete studies without any significant savings capacity and others are taking longer to save a 20 per cent deposit.”
Griffith Business School’s Dr Di Johnson says Gen X - those born between 1965 and 1980 - also delayed having children and “upsized” their homes later. “They therefore took out larger mortgages later into the life cycle,” she says.
ViforJ notes Gen X have been using their homes as an ATM to fund expenses such as school fees. “Home loans are increasingly flexible; you can take out as well as put in,” she says.
Gen X’s mortgage debt load is effectively double what homeowners had 20 years ago. ViforJ says based on ABS numbers, the mortgage-debt-to-income ratio for 35 to 44-year-olds was just 92 per cent in 1990 but has surged to 209 per cent in 2015.
Mortgaged in his 70s
Gen-Xer Miles, who identifies legally by his first name only and lives in Meredith between Geelong and Ballarat in Victoria, has a $450,000 mortgage after building a home on a block of land.
He is hoping to pay down a big chunk of his mortgage from investment “windfalls” to make it more manageable. But he still expects to have a mortgage in retirement. “I figure I’ll probably still be paying a mortgage in my 70s,” he says.
Miles says his generation “shrug” and accept that a mortgage in retirement is likely.
But Johnson says there are risks to entering retirement with a mortgage, including the cost of servicing debt and interest rates. Health shocks, unexpected costs and disability could worsen those risks.
“Anyone who is still servicing a debt in their retirement years is likely to have [less money to spend] on living essentials such as food, clothing, utilities, healthcare, transport, travel and other activities,” explains Marler. “Research shows that carrying debt into retirement is one of the key detractors of life satisfaction. Emotionally, owning a home provides an anchor to the community, local activities and relationships.”
ViforJ also warns against holding a mortgage in retirement in the hope of exploiting capital gains. “We have a much more volatile economic environment. The assumption that house prices are going to go up over time so it’s ok to be carrying debt into retirement is not a wise assumption.”
Not worth the risk
At 55 years, Giulietta Carbone is at the top end of Gen X. She is not prepared to risk a mortgage in retirement.
Carbone lives in a holiday house in Cape Jervis in South Australia which has a $389,000 mortgage. She is also looking to develop a block of land at Padthaway, which may require a mortgage of between $300,000 to $400,000.
Carbone says she doesn’t want to be shackled with a mortgage by the time she retires. She recently renegotiated her home loan and saved $280 a month; she is also going to accelerate payments by $100 to $200 a fortnight. “I want to pay my mortgage off before I retire,” she says. “I want to have extra money in my pocket so I can enjoy it.”
To cope with a mortgage in retirement, some will work longer, though that can be complicated by health issues and unemployment.
Johnson says by the time Gen-Xers retire, they should also have better access to low-cost options allowing them to efficiently and safely draw on home equity for income in retirement.
Many others will use superannuation to pay off mortgages, already a popular strategy for Baby Boomers.
“Generation X are the first generation that have had Superannuation Guarantee contributions at nine per cent or more of their wages for most of their working life,” explains Marler. And they’re using it. According to MLC’s “The Roof over Retirees’ Heads” report, for those Australians who withdraw lump sums from their superannuation, approximately 20 per cent of over 65s withdrew that money for housing purposes; mostly to pay off their mortgage, or to help fund the purchase of a new home or home improvements.
Marler adds: “They may need to use some of their superannuation savings to discharge mortgage debt at retirement, sell their home or downsize and move to a less expensive location in order to discharge debt. However, this does mean their retirement income may be less and they may rely in part on the age pension.”
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