Home loan debt surge is now a tricky trap for retiring Aussies

Retiring with a mortgage is an increasingly common juggling act, but experts say there are ways to reduce the financial pain.

Three years of high interest rates are forcing more Australians to brace for the impact of retiring with mortgage debt.

As another Aussie lender introduces a 40-year home loan, first home buyers are getting older and mortgages are bigger, the number of people carrying housing debt into retirement will continue climbing, lending specialists say.

An analysis of Bureau of Statistics data by Mozo.com.au has found that in the decade to 2020, the proportion of homeowners aged 65-to-74 with a mortgage surged more than 44 per cent, to 13.4 per cent of them.

The proportion of homeowners aged 55-to-64 with mortgages jumped 37 per cent, to 43 per cent of them, it found.

“Retirees focus on superannuation balances and pension eligibility, but it looks like there’ll be an increasing number of Aussie retirees adding ‘how do I get rid of my mortgage?’ to their retirement checklist,” said Mozo finance specialist Rachel Wastell.

Juggling mortgage debt with other retirement costs can be a money trap. Picture: iStock

She said the trend reflected factors including median home values surging from $571,500 in 2014 to $985,900 today, delayed home ownership as the average first-home buyer age reached the mid-30s, people tapping into home equity and a range of life events.

“Divorce, job loss, the financial impact of Covid and the rising cost of living have all played a role in delaying mortgage pay-offs,” Ms Wastell said.

Credit Union SA is introducing a new home loan with a loan term of up to 40 years, joining five other lenders in this space.

CEO Todd Roberts said while 40-year loan terms meant a higher amount of total interest paid over the life of the mortgage, there was flexibility to reduce the term, and initial repayments on a $500,000 debt could be $133 cheaper per fortnight than a 30-year loan.

“Getting a foot in the door is challenging with rising costs of living and average property prices skyrocketing,” he said.

“People are finding it harder to save for a deposit and commit to higher ongoing repayments.”

Canstar director of data insights Sally Tindall said five other lenders offered 40-year home loans – G&C Mutual Bank, Australian Mutual Bank, RACQ, Resi Mortgage and Pepper Money – while ubank offered 35-year mortgages.

“Borrowers can be attracted to longer mortgages because it has the capacity to significantly reduce their monthly repayments,” Ms Tindall said.

“However, this is because these repayments are spread out over an extra five or ten years, which means they’ll be paying their bank interest on the money they owe for a lot longer,” she said.

“If an owner-occupier looking to borrow $600,000 took out a 40-year loan term, instead of a 30-year loan term, at the same rate of 5.99 per cent, their initial monthly repayments would be $296 lower. However, by opting for the longer loan term they could potentially end up paying over $240,000 more in interest if they stick to the 40-year loan term.”

Mr Roberts said when entering retirement, it was best to have mortgages and other personal debts repaid or close to being repaid. He said people could shrink loan terms by making extra repayments, using offset accounts and seeking professional advice.

Ms Wastell said extra repayments early were important, and people could refinance at a lower interest rate and avoid unnecessary redraws.

“Begin budgeting and making mortgage repayments with your retirement in mind, even if you’re only in your thirties – it will pay off in the long run,” she said.

Originally published as Home loan debt surge is now a tricky trap for retiring Aussies