As more Canadians slide closer to the typical retirement age of 65, the idea of becoming debt-free and mortgage-free in retirement becomes so much more appealing. For some, like financial counsellor Jessica Moorhouse, it’s about planning. She and her husband intend to pay off their mortgage when they are still in their 40s so that the couple can spend a retirement focusing on new hobbies or ventures. While the Moorhouse plan includes being mortgage-free in retirement, not everyone will be as organized or as disciplined. That’s a problem, says Moorhouse.
“Retirement should be a time in your life that’s full of financial security and freedom,” said Moorhouse. If you are interested in travel or would like to help your children pay for some milestone moments, such as a new home or a wedding, then you need to plan now for a secure financial future. This could include paying off the mortgage before reaching age 65 if you haven’t already done so. Find out if you’re on-track to become mortgage-free in retirement and how to get there.
How do you know if mortgage-free in retirement is an option?
Statistics Canada numbers show that 34% of retirees over the age of 55 still hold some kind of debt. While this can include a home mortgage, a car loan, a personal loan or a Home Equity Line of Credit, the key is to prevent this debt from letting you realize the next stage in life.
To prevent negative repercussions of debt in retirement, it’s best to examine your current financial situation and then project out into retirement and then 10 years into retirement. To start, gather all the information you need. Talk to you mortgage lender to find out what the remaining balance is on your mortgage. If possible, ask for a mortgage disclosure statement — keep in mind, however, that some lenders will charge you for this document. To create a free version, find an online mortgage calculator — say from RateHub or your lender — and use the calculator to create an amortization schedule that shows you the mortgage debt until it’s paid off.
Janet Gray, a financial planner at Money Coaches Canada, is a big believer in knowing what the bottom line says. People need to know their numbers, she says. “Not just their current numbers, but they need to know what they expect their living costs will be in retirement,” she adds. “Do I want my cash flow to go to a mortgage payment so that I can stay in this wonderful house that I love? Or am I willing to give up that money to pay for this wonderful house and not be able to travel?” Calculate your current monthly expenses, and compare them to what you’d like your expenses to be in retirement. Just remember to leave some cushion, just in case things change or you have to purchase something that requires a monthly payment.
Most financial planners will recommend that their clients start calculating their mortgage payments and crunching the numbers around 10 to 15 years before the proposed retirement age — depending on their lifestyle. Some may have already decided they are done travelling and just want to relax, whereas others will know they want to continue to enjoy yearly holidays. The key is to start thinking about your options, now. This helps identify the fears and the blocks — obstacles that can be overcome with knowledge, says Gray, “The worse thing would be to take consumer debt into retirement,” said Gray, a situation that usually occurs when a person ignores or avoids the planning aspect of retirement.
How can you ensure that you’ll be mortgage-free in retirement?
When you know your financial situation, you’ll have a better idea of your options pre- and post-retirement. For instance, if you want to be mortgage-free in the years when you’re not earning an income, you may decide that making extra payments toward that debt now would be best. You’d be surprised at how quickly you can decimate your mortgage with a few extra payments, says Gray.
For those unable to make extra payments prior to retiring, Gray offers two solutions: Increase your income or decrease your expenses. One option would be to sell your current family home and downsize. A few years ago, a TD report on baby boomers reported that 80% of Canadians between the ages of 45 and 64 said their next move would be to downsize to a smaller home. This is always a good option, says Moorhouse, particularly if your family home has increased in market value significantly. This extra-equity could offer you plenty of options including a mortgage-free retirement, as well as extra-cash for your retirement fund. “Your five-bedroom house may have served you well while raising your family,” says Moorhouse, “but in retirement, you may want a dwelling that’s easier to maintain and cheaper carrying costs.”
For those that want to stay in their current home, there are options.
The first strategy to becoming mortgage-free in retirement is to accelerate your mortgage payments. Moorhouse suggests increasing your mortgage payment frequency to bi-weekly payments. “For example, paying bi-weekly on a $500,000 mortgage amortized over 25 years would knock off two and a half years off the full amortization of that mortgage.” Bi-weekly payments add a couple of extra mortgage payments each year, money that helps reduce the overall debt, which reduces the total interest paid on the loan and this reduces the length of time it takes to pay off the debt.
The second option is to consider making extra payments on your mortgage using prepayment privileges. Lenders typically allow borrowers to make an additional payment that is 10% to 20% of the total loan amount. These additional payments may be made each month or only on the anniversary date of when you first opened your mortgage. It’s extremely important to speak with your lender or review your mortgage terms prior to making any additional payments, as going any unauthorized prepayments could result in a prepayment penalty.
Just 15 years until retirement, what are my options?
Let’s look at an example. A 43-year-old female bought a home for $500,000, just a decade ago and she has a year remaining until her fixed-rate mortgage term is up for renewal. The remaining mortgage is now around $300,000 and she would like to retire in 17 years, at the age 60. Using a mortgage calculator, our homeowner learns she has 14 years until she is has paid off this debt. The great news is that she will enter retirement mortgage-free and she doesn’t have to alter her current payment schedule in order to do achieve this.
But, what if our homeowner decides she really wants to retire five years earlier, at age 55? Now she only has 12 years to pay off her mortgage, can she still retire mortgage-free?
Money Coach, Janet Gray would advise this client to consider three options.
Option 1: Speak to her lender about prepayment privileges, particularly bi-weekly payments. If possible, she should go back to her lender and renegotiate on the current mortgage so that she can take advantage of double-up or accelerated payments.
Option 2: Is to seek out a mortgage renewal that has generous pre-payment privileges and then take advantage of these options by making extra payments. These additional payments will go directly to paying off the principal debt and this reduces the overall interest paid and shortens the amount of time it takes to repay the loan.
Option 3: She could continue to make mortgage payments for the first three years of retirement.
“It’s okay to have a mortgage in retirement if you have the means to pay that mortgage in retirement,” says Gray. “The real solution to the debt-free dilemma is to know your numbers.”