Now that we are living longer, retirement can be a three–decade period, sometimes more. That’s a long time to be worrying about debt.
Despite its significance, a large number of Australians aren’t thinking about retirement early enough. As a result, more and more Aussies are now working into what used to be considered ‘retirement’ years to pay off their mortgage. On the other end, those who do retire are more likely to experience financial insecurity.
But with some planning, you can make a big dent in your debt and improve the quality of your retirement.
More mortgage for longer
Significantly more Australians are retiring with debt, according to a recent study by the Australian Housing and Urban Research Institute (AHURI). With house prices rising and wage growth on a slower trajectory, many retirees are struggling to keep up with mortgage debt.
Between 1987 and 2015, the average mortgage debt for over–55s jumped from $27,000 to over $185,000.
It was found that mortgage repayments were the largest expense for retirees, eating up to one third of their spending. With ongoing repayments some retirees are left without enough funds to cover basic living costs. About 8% of older Australians with mortgages have reported falling behind on utility bills, compared to the 3% of outright homeowners.
Looking at data from the Australian Bureau of Statistics’ survey of income and housing, there are similar findings, with an increase in homeowners owing money on mortgages across every age group between 1990 and 2015. But the biggest rise in debt is among homeowners approaching retirement.
The cost is bigger than you think
It is undisputed that being indebted adds to psychological distress. Alarmingly, these impacts are more profound for older individuals who have less ability to recover from financial shocks.
This growing debt has also increased the chance of poverty during retirement. With unwelcome risks including forced retirement due to health or an employment shock, plans to keep up with repayments may be derailed.
From 2000 to 2010, approximately half a million Australians age 50 and over lost their homes.
How you can own your retirement home
Financial planners suggest that you should be looking to pay off your home at least ten years before you retire. To do this, you need to map out how you will reduce your home loan debt.
- Bump up repayments as the funds become available. If you find you’re managing repayments comfortably, incrementally bump this figure up by $50 a week. Eventually, you will find the right balance for your cash flow. You can find more tips on getting ahead here.
- Selling unwanted belongings is a useful strategy to put money towards your home loan. With a lifetime of accumulating belongings, one big overhaul could add thousands to your income.
- Lump sum payments are a great way to lose potential accrued interest. This could come from an inheritance, the sale of a vehicle or even a garage sale.
- Shop around and refinance. With some home loan rates at the lowest ever recorded, below 3%, refinancing could help secure a better deal. With less interest, you could keep your repayment the same and shorten the lifetime of your loan by years. You can find more information on refinancing here and here.
- See a financial planner. If you’ve already hit your 50s, it’s time to sit down and devise a plan on how you will pay off your mortgage before retirement. This might require you to cut your spending or make other changes but doing this while still earning a salary will give you greater flexibility.
- Talk to your accountant. Checking in with your accountant could help you find the most tax effective way to pay off your mortgage, while saving some money in your super account for retirement.
Words by Michelle Elias
Want to know more about your options for investing in property during retirement? Contact eChioice and we’ll help you find the right deal. Our brokers have access to 100’s of home loan products, so we’ll be able to find you the right mortgage.