A new study released by the BMO Financial Group indicates that more than half of Canadians are planning to carry a mortgage into their retirement years, despite conventional thinking that a mortgage should be paid off before retirement begins. According to the study, which surveyed 1,000 Canadian home and condo owners, 51% of Canadians expect to carry a mortgage into retirement, while 52% said that they felt mortgages and other debt loads were making it hard to plan or save for retirement.
The numbers were highest in British Columbia and Quebec, where 59% and 58% of respondents said they thought they would be carrying a mortgage past retirement. In both Manitoba and Saskatchewan, 48% were still expecting to continue carrying a mortgage after retiring, as were 47% of Ontario and 46% of Albertan respondents. Numbers were lowest in Atlantic Canada, with only 43% of respondents saying they thought they would carry their mortgage into their retirement years.
Low Interest Rates Contribute to Trend
Consistently low interest rates are one reason for the changing trend, BMO deputy chief economist, Doug Porter told the Financial Post. The rates cause people to take on more debt than they usually would, while also providing less incentive for people to save, Porter explained. This could force people to stay in the workforce longer than before.
Longer amortization periods are also contributing to the trend. Where mortgages used to be paid off over 25 years, banks began extending the repayment period to as long as to 40 years before the government stepped in, limiting amortization periods to 30 years.
“If you’re buying a home at the age of 30, the difference between paying off your mortgage at 55 instead of 60 can have a significant financial impact on the retirement picture,” noted BMO Mortgage Expert Laura Parsons in a statement.
Compounding the problem is the fact that real estate prices in Canada have been going up. According to the Canadian Real Estate Association, the national average house price was $375,810 in April 2012, and 80% of markets have seen average sale prices increase on a year-over-year basis.
But not everyone agrees that carrying a mortgage into retirement is such a huge problem. In the same article, Phil Soper, chief executive of Royal LePage Real Estate Services, told the Financial Post he thinks retired homeowners can manage the load, since people today are retiring later and are more sophisticated when it comes to personal finance.
Paying It Off Faster
Still, for those looking to pay off their mortgage faster and escape that debt burden before retiring, BMO recommends choosing a shorter amortization, increasing your payments, and/or switching to bi-weekly payments instead of monthly ones; homeowners can also try to take advantage of pre-payment privileges wherever possible.
Paying Off the Mortgage With a Reverse Mortgage
While paying off a mortgage with a reverse mortgage may sound counterintuitive, it’s a good move if you want to eliminate monthly payments during your retirement, especially if you are planning on staying in your current residence throughout your retirement. The only commitment a reverse mortgage requires is that it is paid back on the sale of your home, so moving into your dream retirement home is the first order of business. You shouldn’t have to worry about mortgage payments in retirement, and a reverse mortgage is another way to get there.
If you’d like to find out more about reverse mortgages, contact Horizon Equity and we’ll be happy to give you all the information you need.