The Sandwich Generation "Financial Squeeze"
26 February 2018
Last year, (p.12) revealed 46% of older working Australians expected to retire with debt, 21% expecting it to be mortgage debt.
Residential property is the major component of wealth for many Australians who are close to retiring, but the boom in house prices has also led to an increase in debt and an increasing number of Australian seniors carrying mortgages and debt into retirement.
The Curious Case of Intergenerational Dependency
Many of those who said they are expecting debt after retirement will not even be leaving the workforce soon. The white paper called this group the “sandwich generation” who are trapped in dealing with a phenomenon known as intergenerational dependency.
This generation typically are supporting parents who had not saved enough for their own retirement, and adult children not yet financially independent or purchased their first home.
Based on a research conducted by Swinburne University, people who don’t own a home by the time they are in their 40’s will have lower tendency to own one. The research reveals that more Australians are renting during retirement and experience financial stress.
This increasing problem of indebtedness could affect the standard of living during retirement. Carrying mortgage debt into retirement could lead to financial stress, as the majority of assets for Australian seniors are locked up in their family home and, for most, it is their most valuable asset.
Even though any debt might be offset through superannuation savings and other investments, it is usually ideal for people in their early 40s to plan to settle their debt before leaving the workforce.
Indebtedness Could Force Australians to Downsize
This grim outlook for Australian seniors could mean that there is a considerable pressure for downsizing, which is not always the first choice for seniors due to many reasons including: emotional attachment; practicality and comfort; and the financial constraints of selling such as stamp duty.
According to a survey conducted online by LJ Hookers Seniors, more than a third of respondents have two extra bedrooms and at least 1 in 5 have three or more spare rooms. If you are living in a large, valuable house that is too big for your needs, is difficult and expensive to maintain, and you can release material equity by selling to maintain lifestyle, downsizing can be a great option.
However, it may not be ideal for retirees to sell their homes and then rent or buy another, and another property in a new location may not have the available support services, and existing social connections, that had been hoped for during a retirement.
A Reverse Mortgage could be the answer
Repaying a mortgage during retirement can be a huge burden, particularly if your income during retirement will be sourced from the aged pension alone.
Instead of selling the family home to repay this debt, you could apply for a reverse mortgage that will allow you to unlock home equity and access the cash needed to take away the financial pressures of assisting parents, helping children, and making debt repayments.
With a reverse mortgage, you can access the equity in your home through a loan rather than downsizing. You have an option to take the loan as a lump sum, a cash reserve to draw as you need in the future, regular advances over time, or a combination of these options.
You can stay at your home for as long as you choose. The main difference compared when comparing a reverse mortgage to a traditional mortgage is that there is no requirement to make any loan repayment until the end of the loan. If you do not make the interest repayments, they are added monthly to your loan account. At the end of the term of your loan, when you move permanently from your home, the total interest charged, together with the principal is payable.
Selling the family home or taking a reverse mortgage is an important decision that you should not decide on a rush. Here at Heartland, we are proud to have helped over fifteen thousand customers live a better retirement with our reverse mortgage. For more information on how our loan could help, please feel free to contact our friendly team on 1300 889 338 or [email protected]. We are here to help you.
Information provided is accurate as at 26 February 2018 and may change from time to time