How you can pay off your mortgage in retirement
AMP financial adviser Mark Haynes is a Certified Financial Planner (CFP) and Principal of Adelaide-based Haysman Financial Services. He specialises in retirement planning, superannuation and self-managed super.
While it might be most people’s goal to finally pay off the family home while they’re still working and sail into retirement mortgage-free, in reality that’s not the case for many Australian retirees.
A recent AMP.NATSEM report found that retirees are taking more debt into retirement than ever before. For people aged over 65, mortgages now make up almost a third of their household debt – a big rise from 20 per cent a decade ago.**
What’s more, of the top 10 per cent of most indebted households in Australia, it’s the over 65-year-old households that have increased their level of debt the most - their mortgage repayments to income ratio have almost doubled from 9 to 17 per cent over 10 years.
If retirement is on your horizon and you have more years left on your home loan than you have in the workplace, here are four ways to help reduce your debt:
Use a lump sum of super
Unless you want to delay your retirement, one way to eliminate debt is to take some of your super savings as a lump sum and use it to pay off your mortgage. Let’s say you’re about to retire with $200,000 still owing on your home and you have $300,000 in super. You could pay off your home loan and be debt free while still earning an income from your remaining $100,000.
Take advantage of superannuation
If you’re still working, you may be financially better off by converting your loan to interest only, accumulating more money in super and then repaying the debt as you reach retirement using that extra super that you’ve built up. This will involve carrying more debt into retirement with you, but may be a better option in the long run.
But it’s also important to consider the impact on your debt repayments if interest rates rise or the economy takes a downturn and you’re earning less on your superannuation money. You also need to be comfortable with taking your debt into retirement.
Downsize the family home
This is another way to pay off the mortgage and improve your retirement lifestyle. Downsizing can free up equity to invest for a retirement income – but only if you buy something cheaper, which can be a big trap for many retirees. After all, some retirees who downsize actually spend more on a smaller but more luxurious property, which won’t help your financial situation if retiring with debt.
Even if you do buy a less expensive home, you need to factor in all the extra costs of moving, including stamp duty, re-furnishing or re-decorating, to ensure moving home works for you – both in terms of dollars and lifestyle.
Work longer
If you’re fit and healthy and still enjoy working, then staying in the workforce beyond 65, even on a part-time basis, will reduce your need to tap into your super and help you to minimise bad debt and accumulate more wealth before your retirement send-off.
If you’re concerned about taking debt into retirement, talk to a professional financial adviser about all the options to deal with your debt.
Mark Haynes is an Authorised Representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.
**AMP.NATSEM Income and Wealth Report, Buy now pay later: household debt in Australia, December 2015.
Related links:
Government to water down proposed changes to super
The gap between retirement dreams and savings reality
It’s not too late to reclaim your lost super