If retirement beckons but you’re still paying off a mortgage here’s what you can do

What happens when your mortgage outlives your career? If you’re aged 55 to 64 with a mortgage don’t panic, there are a few tricks to know to help move towards a happy retirement.

Over the past 20 years house prices have risen almost 200 per cent, but wages grew by 80 per cent.

What happens when your mortgage outlives your career?
In a clear sign of the times, more people than ever are entering retirement without paying off their home loan.

ABS data shows that more than 50 per cent of Australian homeowners aged between 55 and 64 still have a mortgage, which is a 135 per cent increase compared with 20 years ago.

But do not fret if you are one of the statistics. There are a few tips and tricks available to help you move towards a happy retirement without the burden of a home loan to contend with.

On the surface it may seem that Australians are becoming increasingly irresponsible by not prioritising repayment of their home loan above other household spending. However the data tells a different story.

Over the past 20 years, house prices in Australia have increased by almost 200 per cent, yet wages have only grown by 80 per cent – meaning it gets a little bit harder each year to crack the property market.

With people purchasing properties later in life, it is not surprising that more people have debts when they retire.

And if changes to life circumstances also occur such as a divorce or having to dip into savings to help children under the “bank of mum and dad”, this can perpetuate the problem.

Selling the house

Sydney-based mortgage broker Wayne Dive from Mortgage Choice says: “A lot of people who have mortgages at retirement end up selling their freestanding home and purchase a retirement-friendly townhouse or apartment in a similar area to stay nearby to family and friends while paying off debts and potentially freeing up hundreds of thousands of dollars.”

If there is money left over after the property swap, there is a government measure that allows you to put some of the proceeds into super outside of normal aged-based contribution caps.

If you owned your home for 10 years or more and are at least 55 years old, you can contribute up to $300,000 per spouse into super within 90 days of settlement. There is no upper age limit on the “downsizer contribution” meaning that you can be over the age of 75 and still be able to contribute to super under these rules.

“For people who do not wish to downsize, superannuation goes a long way to clear debt at retirement, especially with interest rates so high at the moment,” Dive says.

Drawing from superannuation

While sharemarket returns have been strong over the past 12 months, you can achieve what is effectively a guaranteed 6 to 7 per cent return by drawing from super to pay debt if you are aged 60 and retired.

Up to $1.9m can be withdrawn tax free as a lump-sum pension payment; otherwise if you are still working at 60, up to 10 per cent of your super balance can be taken out each year under transition to retirement pension rules.

“Retirees need to be careful about depleting savings to pay off debt because unexpected expenses can occur. This can range from out-of-pocket medical costs from surgery to property special levies. Both of which can range into the tens of thousands of dollars,” Dive says.

Dipping into super reduces the longevity of your retirement funds, and finding the right balance between managing debt in retirement versus paying it off by drawing from your super is crucial for those who are not ready to downsize.

Part-time work

Some take out part-time jobs in retirement to not only stay active, but also to service their remaining home loan and avoid eating into super.

Others try to work full-time until age 67 when government’s aged pension becomes available subject to asset and income tests.

With high inflation in recent times, the full aged pension rate has increased to just under $30,000 per year for singles and $44,000 for couples.

Single homeowners can have up to $314,000 in assets, excluding their home, and couples can have $470,000 before the aged pension starts to get reduced.

Interestingly, home-loan balances are not taken into account when calculating the aged pension. After all, it is called the assets test, not the net assets test. As such, using cash or super to pay down your home loan may put you in a better position under the assets test when applying for the aged pension.

Granny flat arrangements

Worthy of a mention are “granny flat” interests. This is an arrangement whereby you give cash to someone – usually children – in exchange for an agreement to live in their property for life. There are rules around the calculation but potentially the whole amount can be exempt from the Centrelink assets test rather than be treated as a deprived asset under the gifting rules.

This can work well for people who are not ready to move into an aged-care facility and have family who are willing to share their property with parents.

The payment can be viewed by the family as an early inheritance to help the kids get their own mortgage down while at the same time maximising the retirees’ Centrelink aged pension eligibility.

Start early planning

Australia has some of the most expensive property markets in the world and the trend of people carrying debt into retirement is not likely to ease any time soon.

While it may be too late for those nearing retirement to turn back the clock, advice can be given to the younger generation to get into the property market as early as possible. For most, the earlier you buy your home, the earlier you will pay off your mortgage.

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au