Carrying a mortgage into retirement

For many Canadians, the idea of retirement represents freedom from the constraints of a working life.

However, achieving that ideal is often complicated by financial challenges, including the growing trend of carrying a mortgage into retirement.

While it may be unavoidable for some, managing this financial burden wisely is critical to maintaining financial security and peace of mind in later years.

Why are more Canadians retiring with a mortgage?

A combination of factors has contributed to the rising number of retirees who still have mortgages. Real estate prices have soared in many parts of Canada, leading people to take on larger mortgages that take longer to pay off.

At the same time, some Canadians are tapping into their home equity to fund other needs, such as helping adult children buy homes, financing lifestyle upgrades, or consolidating other debts. Additionally, delayed retirement means that mortgages once planned to be paid off by age 65 are lingering into people’s 70s and beyond.

The risks of carrying a mortgage into retirement

While the risks may seem obvious to many of you, it is important to fully understand all the risks and potential impacts of carrying a mortgage into your retirement years:

1. Reduced cash flow: In retirement, income often comes from fixed sources like pensions, RRSP withdrawals, or government benefits. A monthly mortgage payment can significantly strain a retiree’s budget, reducing the funds available for other essentials like healthcare, travel, or unexpected expenses.

2. Market risk: If a retiree is relying on investment income to cover their mortgage, market downturns can create significant financial stress. A bad year in the markets might force someone to sell investments at a loss to cover mortgage payments.

3. Interest rate exposure: For those with variable-rate mortgages or lines of credit secured by their home, rising interest rates can increase monthly payments, further tightening their budget.

4. Mental stress: The psychological toll of carrying debt into retirement can be immense. Many retirees worry about outliving their money, and adding a mortgage to the mix can exacerbate these concerns.

Are there any positives?

While carrying a mortgage into retirement is not ideal, there are situations where it can make sense. For instance:

• Low interest rates: If your mortgage rate is exceptionally low, it may be more financially advantageous to carry the mortgage while keeping your investments growing at a higher rate.

• Leveraging equity: Accessing home equity for investments or other financial goals can be a strategic choice, provided the risks are well understood and managed.

• Real Estate Appreciation: If property values continue to rise, maintaining ownership of a mortgaged home may still contribute to overall wealth.

Managing a mortgage in retirement

If you find yourself carrying a mortgage into retirement, careful management is essential. Here are some strategies:

1. Refinance for lower payments: Consider refinancing to extend the amortization period and reduce monthly payments. While this may increase overall interest paid, it can ease cash flow challenges.

2. Downsize or relocate: Selling your home and moving to a smaller, more affordable property can help eliminate the mortgage entirely or significantly reduce the amount owed.

3. Use a reverse mortgage: While not suitable for everyone, a reverse mortgage allows retirees to access home equity without monthly payments. However, the loan balance grows over time, reducing the inheritance left to heirs.

4. Budget wisely: Build a retirement budget that prioritizes paying off your mortgage while maintaining a comfortable lifestyle. Consider cutting discretionary expenses where possible.

Tips to avoid retiring with a mortgage

If you still have some years left before you retire, now is the time to plan (or adjust your plans) to make sure you avoid this situation all together:

1. Start early: Aim to pay off your mortgage as early as possible. Consider making extra payments or increasing your monthly payment amount while you’re still working.

2. Plan for the long term: When purchasing a home, choose one that is affordable and fits your long-term needs. Avoid stretching your budget to buy a more expensive property.

3. Avoid equity withdrawals: Resist the temptation to tap into home equity unless absolutely necessary. This ensures your mortgage balance decreases steadily over time.

4. Boost retirement savings: The more savings you have, the easier it will be to manage any remaining debt. Maximize contributions to RRSPs and TFSAs during your working years.

5. Seek professional advice: Work with a professional financial planner to create a tailored strategy for debt repayment and retirement savings. They can help you assess whether retiring with a mortgage is manageable or whether adjustments are needed.

Retiring with a mortgage is not ideal, but it is a reality for many Canadians in our current economic environment. The key is to approach this challenge with a clear plan, no matter how tough your situation may feel, there are always options to consider to improve it.

By understanding the risks, managing the debt carefully, and taking proactive steps to avoid carrying a mortgage into retirement, you can secure a more comfortable and worry-free retirement.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.