Wednesday, July 18, 2012

Heading for Retirement with a mortgage?

Paying off the mortgage is something most homeowners hope and expect to do by mid-life. But those who started late, refinanced or traded up find themselves with mortgages to pay, just as they should be looking ahead to retirement.  Continuing to make house payments may not be everyone’s fantasy heading into the golden years. But there are options to consider for those in their fifties and sixties with sizable mortgages:
  • Accelerate your mortgage payments now and try to pay the mortgage down or off.
  • Keep the house and continue making payments into retirement if you think your retirement income will be sufficient to allow you a comfortable lifestyle.
  • Set up a line of credit instead of a mortgage, that will allow you the flexibility to increase your debt (currently up to 80% of the value of your home) or decrease it according to your needs in retirement.
  • Sell the house and buy something smaller with little or no mortgage
  • Sell the house and rent, investing any money left over to generate income

Staying in your home may offer security, knowing that you will have a significant retirement asset down the road. It also has intangible value, allowing you to maintain your lifestyle in a comfortable space and familiar neighbourhood.  And with today’s low returns on investments, you will never lose if you pay down your mortgage.

Putting money into your RRSP makes sense when you have significant income, and your tax rate is higher than it will be in retirement.  Then you can apply your tax refunds in a lump sum to the mortgage.

There are new products that combine a line of credit with your bank account and may give you the flexibility to increase your debt if your funds are tight in retirement.  The risk of this option or of keeping a large mortgage is that interest rates could rise in the future.

If you’re looking to move or actually have little equity in the home, it makes sense to sell and either buy something more affordable or rent accommodation. One benefit of selling now is that real estate prices across Canada are still relatively healthy.  We do not know what the future holds.

Renting especially makes sense approaching retirement, because if you’re in a more modest place it frees up money to invest for income and to apply to lifestyle. It’s also possible to live wherever you want and transition to accommodations that are near hospitals or more appropriate for those with limited mobility and where it’s possible to eventually receive care.  You will also avoid the additional costs of ownership, such as property tax and maintenance. 

Home ownership, mortgages, cash flow and other issues are important to consider in terms of your retirement readiness.  A comfortable retirement is one where you are not scraping and clawing to make ends meet.

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