Retiring with a home loan hurts, so find ways to slash a mortgage

Growing numbers of Australians are heading into retirement with mortgages hanging over their heads. Here’s how to stop this home loan trap.

Older Australians are being urged to make the most of record low interest rates as a rising number of them enter retirement still saddled by a home loan.

Many have been stung by a combination of high house prices, rising living costs and education fees, and adult children living at home well into their twenties and thirties.

But there are ways to minimise the financial pain and become mortgage-free faster, finance specialists say.

It’s estimated that one in five homeowners aged over 65 have a home loan, according to a recent report by The Actuaries Institute.

And separate research by Curtin University and RMIT University found the proportion of people aged 55-to-64 with mortgages had trebled from 14 per cent to 47 per cent in 25 years.

Wealth for Life Financial Planning principal Rex Whitford said many people had trouble controlling spending and had “mistimed their capacity to repay a mortgage”.

“We have record low interest rates so the impact isn’t so great at the moment, but when interest rates go up they’re going to be in a world of hurt,” he said.

Many Australians have miscalculated how long repaying their mortgage will take.

“Do a budget to find out your capacity to repay. The reason many people are in trouble is they have never done a budget and don’t know what surplus they have.”

Mr Whitford said borrowers could also look at options such as downsizing to a cheaper home, consider working for longer, and ensure that adult children still living at home contributed financially.

“They should be paying rent or board,” he said.

“If you don’t have to retire, keep working because you are a long time retired. The longer you work, the less you need your superannuation.”

The Actuaries Institute report says retirees who own homes increasingly have mortgages, but warned that downsizing might lead to a reduced age pension.

“It seems reasonable to expect a growing number of Australian retirees will use part of their superannuation balances at retirement to pay off their mortgage,” it says.

However, this strategy results in a smaller nest egg to fund the rest of retirement.

Financia managing director Angelo Benedetti said many older borrowers had dipped into their home loans to help their family.

“We see a lot of people in their fifties with mortgages because they took on debt to get their kids through high school,” he said.

“We are seeing a lot of parents feeling obligated to try and help their kids as much as they can.”

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Some people in their sixties still have adult children living in the family home.

“Years ago they would be out the door because it was easier to buy a home,” Mr Benedetti said.

He said older parents should stop bailing out adult children once they turned 23 and should make as many extra mortgage repayments as possible.

“Review your current loan structure and make sure it’s the right one,” he said.

“Now that rates are low it’s an opportune time to get that loan down — we are doing loans under 3 per cent fixed for two years.

“Some people are living beyond their means, but cost of living and education are also big factors.”

@keanemoney

Originally published as Retiring with a home loan hurts, so find ways to slash a mortgage