A mix of low interest rates, high housing prices and waves of baby boomers nearing or already in retirement is increasing Australia's levels of grey mortgage debt.
Greater longevity would also have made some of us more comfortable about carrying debt into older ages than in the past.
Ideally, we would enter retirement with our home mortgages paid off and completely free of any other kind of debt. In theory at least, this may enable us to use our retirement savings to fully or partly finance our retirement.
Yet many retirees reach common retirement ages with outstanding mortgages and other debts. This leads to the inevitable question: How is the debt to be repaid?
A wide-reaching research paper*, Inquiry into housing policies, labour force participation and economic growth, published in June by the Australian Housing and Urban Research Institute at Curtin and RMIT universities, reinforces past findings that Australia's grey mortgage debt is growing.
The project's findings regarding the mortgage debt of older Australians include:
Growing numbers of householders are taking higher levels of mortgage debt, relative to their household incomes, and paying that debt down later in life.
Mortgage stress caused by borrowing more to pay soaring house prices is prompting more homebuyers to extend their working lives.
Retirement nest eggs such as super may be “raided” to pay off mortgages.
The take-up of more debt by highly-leveraged households exposes borrowers and the overall economy to “significant risk” if housing prices fall or if interest rates rise.
Home owners are increasing using flexible mortgage products to unlock housing equity “at all stages of the life cycle”.
What to do about grey debt is clearly becoming a more critical personal finance issue.
Often indebted retirees will, of course consider using at least part of their super to fully pay off or reduce their loans. And some will direct part of their super pensions to make repayments.
Other debt-reduction possibilities for grey debtors include remaining in the workforce for longer than perhaps intended, as discussed by the Australian Housing and Urban Research Institute, or “downsizing” to a less-expensive home.
However, in practice, an attempt at downsizing to repayment debt may not produce the anticipated money – particularly after taking stamp duty and real estate agents' fees into account. And working past common retirement ages may not be achievable – an appropriate job may not be available or health considerations may act as a barrier.
It may be worthwhile seeking advice from a financial planner before taking a new mortgage or drawing down on a home equity loan if it is unlikely that the debt can be repaid by your intended retirement age.
Perhaps you need advice about how to deal with an existing longstanding mortgage as your retirement nears. Don't overlook debt repayment in your financial planning for retirement.
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*The Inquiry into housing policies, labour force participation and economic growth Inquiry into housing policies, labour force participation and economic growth Inquiry into housing policies, labour force participation and economic growth report by Rachel Ong (Curtin University), Gavin Wood (RMIT University), Stephen Whelan (University of Sydney), Melek Cigdem (RMIT), Kadir Atalay (University of Sydney) and Jago Dodson (RMIT).
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
Reproduced with permission of Vanguard Investments Australia Ltd
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