Why are more seniors retiring with mortgage debt?
22 July 2016
In a worrying nationwide-trend, more and more Australians are entering retirement with mortgage debt. According to a new research by ING Direct, there has been a 28% increase in Australians 65 years old and above who still hold a mortgage debt over the past three years. Out of these, 26 per cent hold an investor loan, while 74 per cent are owner-occupiers. Based on the research, the average debt these retirees hold is $158,000.
This change represents a major cultural and financial shift amongst seniors, which has the capacity to materially affect the quality of retirement for generations of Australians.
In isolation this is an alarming development, however it needs to be taken in context of overall financial position. Over the last two decades, house prices have increased significantly, meaning that while indebtedness has increased, so too has seniors overall equity. Take a relatively common example. In 2000, someone might have retired in Sydney or Melbourne with a house worth $400,000. Assuming a 5% p.a. increase in property values, this same property is now worth almost $900,000. Even if they do have a modest mortgage, their equity, and therefore their options in retirement, most probably have increased significantly.
The big question is: how did we get here?
Until quite recently it was the norm for the vast majority of people to enter retirement safe in the knowledge that the home loan was paid off long ago. Not anymore. This appears to have changed over the last decade or so, and although the reasons for this shift are complex and inter-related, if I was to speculate I’d nominate the following key drivers:
1. Higher property prices
Higher property prices are often forcing people to borrow more and take longer to repay debt. While lower interest rates have softened this blow (and to a certain extent enabled the additional borrowing), it is not always possible to retire debt free.
2. People buying their first property later in life.
As the ING report noted, many people are now buying their first home much later in life. Clearly if you start with a mortgage in your 40’s or 50’s, it’s more likely you’ll still have some residual debt when you eventually do retire.
3. A more turbulent jobs market.
Since the GFC, the labour market has become more fragmented. As has been well-documented elsewhere, many full time jobs have been lost to the rise of casual and part-time employment, and my feeling is this is impacting heavily on the earning capacity of pre-retirees. Quite simply, the prospect of steady full-time income right up until the day of retirement is now less common, which affects the ability of many to pay down their mortgage.
4. Baby boomers are more comfortable with debt.
As a Reverse Mortgage lender who’s been operating in the senior’s demographic since 2004, it’s clear to us that the ‘baby boomer’ generation of today is much more comfortable with debt than the previous ‘war generation’.
For those seniors who do find themselves with a residual mortgage debt when approaching retirement, solutions are available. A Reverse Mortgage can ease this financial burden in many cases. By refinancing the existing debt to a Reverse Mortgage it’s often possible to use the equity to pay off a home loan so that monthly repayments are no longer required. Borrowers can still make ‘voluntary’ repayments if they wish, but the regular cash-flow stress of having to service a home loan on a pension or limited income is obviated.
At Heartland, we believe that existing home loan debt should not impede on your ability to enjoy a quality retirement. After years of hard work, retirees deserve to be relieved of financial worries and have peace of mind. Although the trend towards seniors retiring with home loan debt is likely to continue for the foreseeable future, it may at least provide some comfort to know that solutions are available if you find yourself in this predicament.
Heartland Seniors Finance is here to help you anytime. For questions, please call us at 1300 889 338.