How big a deal is later-life debt?

Rising house prices means more of us dangerously rely on super to pay mortgages, writes Nigel Bowen.

While previous generations typically paid off their homes before reaching retirement age, in the course of a decade-long property boom we’ve borrowed more than ever before to buy houses and are much more likely to be leaving the workforce still paying that debt.

Why is this an issue? Because governments assume Australians will be retiring with a paid-off home to live in at minimal cost. As well as money in their super account to supplement (or replace) the modest aged pension.

“If you use your super to get rid of your mortgage, that leaves the pension,” says Robert Snell, financial planner at Life Values. “Which is $33,000 for couples and $22,000 for individuals. You can survive on that income but I don’t think many people would see it as enough to enjoy the comfortable retirement they had hoped for.”

Why it’s so important to pay off your mortgage before retiring.(2.38 mins)

More people are retiring with a mortgage

Just about everything that could have happened to prevent future generations of Australians retiring debt-free has.

Independent economist Saul Eastlake examined the impact of declining home ownership on retirement in the report, No Place Like Home.

He observed that in recent decades Australians have been spending longer in the education system, exiting it with HECS (Higher Education Contribution Scheme) debts that hamper their ability to save a home deposit, and marrying later in life. The latter is relevant because people often delay purchasing property until they are in a serious relationship.

And, rather than being required to save a 20 per cent deposit before buying, many Australians have been purchasing homes with only 10 per cent or even 5 per cent deposits.

While noting younger Australians may be more interested in travelling and other costly activities than saving for a home deposit, Eslake concludes the chief reason those aged 25 to 54 either don’t own a home, or have a large mortgage if they do, “owes more to economic influences – and in particular the deterioration in housing affordability”.

The opportunity-cost of debt

Snell gives the example of an average-earning couple, both 25, who bought a house in Sydney a decade ago at what was then the average price of $521,000.

“If they put their minds to it, they could have the mortgage paid off by now,” Snell says.

“In contrast, imagine they waited and, at age 35, bought a house now at the average price of $1.15 million. Even if they put their minds to it, there’s just no way that mortgage is going to be paid off for at least 20 years. I’ve run the numbers and by buying at 25 rather than 35, that couple would be $2.3 million ahead by retirement age.”

Snell’s story illustrates what potentially lies ahead both for individuals and Australian society.

The 2017 Household, Income and Labour Dynamics in Australia Survey (HILDA) showed that between 2011 and 2015 only 9.9 per cent of male retirees and 13.1 per cent of female retirees used their super to pay off debt. But most of those people bought property back when housing was still affordable.

The HILDA survey showed that between 2002 and 2014 the average mortgage debt of homeowners in the 18 to 39 age range increased 99 per cent in real terms from $169,000 to $337,000.

And the situation has almost certainly worsened since then as house prices continue to grow.

Paying your mortgage off faster

Encouragingly, with a bit of forward planning and sacrifice it is possible for people paying off a property to enjoy a comfortable retirement.

“That minority of people who think 10, 20 or 25 years ahead and take appropriate action to secure their financial future are the ones most likely to have the money to enjoy life once their careers end,” Snell says.

Snell’s first piece of advice is to forget about taking out a reverse mortgage.

“They can work well if you’re 85,” he says. “But at 65 you’re not going to be able to access more than around 20 per cent of the equity in your home through a reverse mortgage.”

While a reverse mortgage won’t save you, what Snell refers to as the ‘Game of Homes’ might.

“Put bluntly, many people have resigned themselves to the fact they will only be able to either get into the housing market, or make a big dent in their existing mortgage, when their parents pass on,” he says.

Those who can’t rely on an inheritance may want to consider downsizing, especially if their children have flown the nest.

“There are tens of thousands of dollars of costs involved in selling the family home and moving to cheaper one,” says Snell. “Nonetheless, if you’ve got $300,000 owing on the mortgage and you move to a house or apartment that’s over $300,000 cheaper, then that’s your debt problem solved.”

Alternatively, as younger Australians are endlessly exhorted to, middle-aged mortgagors can cut back on expenses – overseas holidays, new cars, smashed avocado on toast – and throw every spare dollar into shrinking the mortgage.

This strategy can be turbo-charged by accessing super early and using it to clear your mortgage before you stop working.

“People can opt for a ‘transition-to-retirement’ pension,” Snell explains. “Once you reach what’s known as ‘preservation age’, which is between 55 to 60 depending on when you were born, you can take out up to 10 per cent of your super balance each year. If you had, say, $300,000 in super you could take out $20,000 to $30,000 during your final years in the workforce and put that towards paying down your mortgage.”

A solid investment

There are good reasons Australians down the ages have prioritised paying off their house before contemplating other investments.

“You can put money into voluntary super contributions or shares but a bedrock piece of financial advice is to prioritise eliminating non-tax-deductible debt,” Snell says.

“The return on other investments will vary. But if you’re paying 5 per cent interest rate on your mortgage you’re effectively getting a 5 per cent return on the money you use to pay it off. Apart from all the financial benefits, there’s a real sense of security that comes with knowing you own that asset outright.”

Steps for a debt-free retirement

1. Don’t over-commit when you take on a mortgage

Be realistic about how much you can afford in repayments so your mortgage is paid off before you retire.

2. Prioritise paying down your mortgage

Speak to a financial planner to work out if there are ways to pay off your mortgage faster.

3. Maximise your super

Work out how much super you need to have a comfortable, independent life.
(These calculators can get you started.)