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Retiring with a mortgage in Canada: is it a good idea?

by Corben Grant on 17 Aug 2022

The dream of retirement is a near-universal goal for Canadians. After a lifetime of working to pay the bills and set some funds aside for the later years, we all look forward to the stress-free days when we can at long last enjoy the fruits of our labours.

However, though retirement is often looked forward to as a time of relaxation, it also is the cause of a lot of anxiety among young and old alike, primarily around just how you plan to fund it all. You may plan to stop working in retirement, but that doesn't mean the bills stop coming in.

One particular large burden in retirement can be a mortgage. Though many retirees have long since paid off their homes, others still maintain a mortgage, either by necessity or choice. This mortgage can be a large financial burden on those with only a retirement income, and it should be carefully considered whether or not going into retirement with a mortgage is a sound idea.

The answer to whether or not to have a mortgage in retirement is not a simple one and will be different for nearly every person. In this article, we will attempt to provide some things you should consider when it comes to choosing what is right for you in retirement.

The challenges of having a mortgage in retirement

The difficulty of having a mortgage in retirement is pretty clear: retirees are often working with limited funds, and the money they do have is more crucial than ever for ensuring their comfort in old age. Regular mortgage payments can significantly eat into these funds, and damage your overall financial health.

For many Canadians, their home is a major part of their retirement plan. It provides not only a place to live, but also access to funds in the form of home equity or a reverse mortgage, or in some cases liquid funds from selling. For those who still have unpaid mortgage loans, however, your home becomes a burden rather than a boon.

On the other hand, many seniors are attached to the homes they have and plan to stay there for their remaining years. If they aren't content with selling or downsizing, continuing to pay the mortgage may be their only option.

In general, most financial planners would advise entering retirement with the lowest amount of debt you can manage in order to have the greatest financial freedom. This would mean doing what you can to pay off your mortgage prior to retiring. However, this gets more difficult if you are approaching retirement age with an existing mortgage. Paying it down before retirement may cut into your ability to save for retirement which can put you in a tough spot.

For those who decide to continue paying their mortgage in retirement, it is crucial that you determine you can afford the payments without sacrificing your quality of life. You should do as much as you can to reduce your debt as much as possible in retirement.

If you aren't going to be able to pay off your mortgage in time before you retire, you should at the very least attempt to pay off any other debts, especially those with high-interest rates like credit card debt. If necessary, you may also be able to consolidate your debts within your mortgage to reduce your debt service costs.

You might also want to try to renew or refinance into a mortgage with a lower rate or lower monthly payments, in order to reduce the overall burden on your finances.

Finally, when deciding if it is reasonable to continue paying your mortgage in retirement, you should think about just what retirement means to you. Do you really need your whole home anymore? Often retirees choose to downsize from their larger homes to something more modest. Do you plan on travelling or living a portion of the year in warmer climates? It may not make sense anymore to continue paying your mortgage if you aren't really going to be around and using the home much. If you truly do plan on living in your home and using the space fully, only then may it be worth it to completely write off the idea of downsizing or selling.

Ways to help reduce your financial stress in retirement

If you are going into retirement and are concerned your savings and pensions won't be enough, there are many different ways that you can try to get access to more funds. These won't work for everyone, but they have established methods that have been used by many in the past. If you are in doubt about your retirement funds, you should speak to a financial advisor as soon as possible to figure out what strategies may work for you.

Some of these strategies can be used at the same time as having a mortgage, in order to reduce your expenses, while others will assume you have already paid off your home. let's take a look.

Reverse mortgages

Reverse mortgages are a popular choice for retirees to access their home equity. In fact, financial institutions only offer reverse mortgages to Canadians above the age of 55. With a reverse mortgage, the bank pays out a loan in regular payments over time. Eventually, at the end of the loan, you will have received the full available value of your home equity, and you can then pay off the loan through the sale of your home.

HELOC and Home Equity Loans

Another way to access your home equity is to use a HELOC or home equity loan to fund your retirement income. HELOCs usually have some of the best interest rates around, and you may even be able to make interest-only payments on the money you take out. This can be a great way to get money from your home equity without having to sell.

Renting out your home

Especially if you must keep paying your mortgage in retirement, it may be a viable option to rent out a portion of your home to collect some additional income. This can also be a great option if you were planning on downsizing anyway, as this allows you to keep the same home while using some of that extra space to offset costs. Naturally, renting out a portion of your home won't cover your entire monthly mortgage payment but it can do a lot to take some of the burdens off yourself.

Downsizing

One of the most popular practices for those in retirement is to downsize their home in order to reduce costs and take out some of their equity. Often homeowners will buy a home earlier in life that is big enough for their whole family, but as the kids grow up and move out, they don't really need so much space anymore. If you choose to sell your home and move to a smaller and less expensive one, you can reduce your expenses and keep the savings to fund your retirement.

Many retirees may also choose to sell their homes and rent a home instead. Depending on the price of your rent as well as the amount you are able to gain from selling your home, this can be a very smart move financially. At the same time, renting provides some flexibility for older people who don't want to be responsible for many bills as well as home maintenance, and can make it easy to move or go on vacation without worrying about your home.

Cashing out your mortgage and investing

Many retirees use the equity in their homes as retirement income. For some this may mean taking out a Home Equity Line of Credit, or simply selling their home and saving the money. However, it may also be smart to invest the funds from your home rather than simply putting them away in a bank.

Now, naturally, an older person will have less time for their investment to grow and will need to take on much less risk than a younger person, but this strategy has a number of benefits.

For one, you actually reduce some liability by having your money in a more diverse portfolio than just all tied up in your home. At the same time, the returns you get from investing can actually provide you with regular cash flow that a home can not.

In fact, if you take out a second mortgage or home equity loan on your home and invest the funds, it may be possible for the return on investment to outweigh the carrying cost of the mortgage, resulting in pure profit for you.

This strategy is going to work best for those who have a lot of value in home equity, and should also be approached with a healthy dose of caution. Definitely consider working with a financial advisor to help direct your investment efforts to ensure the best returns and low risk.

Continue working

If you have a mortgage debt or are coming up short on your retirement income, this may be an option for you. Though it may be unappealing to many, it is nonetheless a wise financial decision to simply keep working to save a bit more or pay off debts. This may be painful in the short term, but you will be thankful to have done it when you are able to enjoy your retirement truly stress-free.

Continuing to work can help to make your financial obligations a bit lighter, and can also be a way for older people to stay active in their older years. You won’t necessarily need to work at the same pace as in earlier years, and a part-time job may be sufficient for your needs.

Conclusion

Retirement can be exciting, but it can be hard to know if you will be prepared. In general, having a mortgage may make things harder for those who do not have a large amount of retirement income, though it can be managed with smart financial strategies. In addition, there are numerous ways that a retiree can structure their assets and funds in order to make the most of their later years. When in doubt, always consult a certified financial planner or mortgage broker about what options can work for you.



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