Retire that mortgage before you do

Gillian Livingston
Globe and Mail Update

People who fail to pay off their mortgages by the time they hit their golden years are risking their dream of having a secure and fulfilling retirement, says Patricia Lovett-Reid, a senior vice-president at TD Waterhouse.

“If we spend a third of our life in retirement you don’t want to be setting aside a portion of your income to satisfy the debt that should have been retired itself when you were working,” she says. “My greatest fear is that many Canadians may wake up and find that they’re living a quality of life that isn’t as fulfilling because they compromised tomorrow for a better today.”

And with interest rates so low right now, it has encouraged too many people to borrow more than they can afford and live far beyond their means as they focus on their wants and not just their needs.

“There will be a day of reckoning,” she says, especially when rates begin to rise and that debt burden becomes too heavy for some to manage.

Earlier this week, Royal Bank of Canada’s latest housing study found that 57 per cent of Canadians surveyed expected they’d still be paying off their mortgage debt after they turned 55, and nearly one-third said they’ll still be carrying that debt past the age of 65.

Elisseos Iriotakis, a partner at Safebridge Financial Group, says the root of the problem is that more people are living in more expensive cities – with higher house prices and living costs – and what used to take 25 years to pay off is now taking much longer.

“A dollar can only get stretched so far,” he says. And today, people’s finances are being pulled in so many directions: paying for the cost of living, repaying debt, building up RESPs for their kids, RRSPs for their retirement and TFSAs for their emergency funds.

Here are some of their tips to help people get rid of their mortgage debt before they’re eligible for seniors discounts.

Put your mortgage first

“You have to prioritize,” says Mr. Iriotakis, and realize that paying down your debts, including your mortgage, gives you a guaranteed return – something you won’t get from the volatile stock market.

So paying yourself by paying down your mortgage is a “guaranteed” return, he says. “It’s better than a GIC, so by knocking down your mortgage you’re guaranteed that 3 to 4 per cent.”

And paying off your mortgage debt faster will save you thousands of dollars in interest payments, he adds.

Ms. Lovett-Reid says if you don’t take your hefty mortgage seriously, you won’t pay it off. And while paying off your mortgage may not be “exciting,” it will bolster your personal balance sheet.

Give your mortgage payment a raise

Mr. Iriotakis suggests home owners increase their mortgage payments each year by the rate of inflation, at a minimum, and if you get a raise, increase your payments by the same percentage.

And if you have a variable-rate mortgage, “keep your payments at a five-year [fixed] rate or greater ... so that helps you to reduce your principal a lot quicker.”

Choose your mortgage carefully

If you have some expenses coming up, Mr. Iriotakis suggests to his clients to keep with a 25-year amortization with their mortgage even if they can afford larger monthly payments. That way they won’t have to borrow at higher rates to cover those other expenses and can make lump-sum payments on their mortgage when they have extra cash. But this only works if you have the discipline to save the money and make the extra payments, he notes.

Mr. Iriotakis also suggests people don’t blindly take on a five-year mortgage because that’s what their bank says. On average, most mortgages are about 3.5 years long – which means many people locked into five-year mortgages are breaking them – and paying substantial fees – before they come due. About 70 per cent of consumers break their mortgage before its term is up, he says, some due to divorce, refinancing or to get a better interest rate.

If you are not disciplined with your cash, then pay as much each month as you can afford towards your mortgage and choose accelerated bi-weekly payments, since that’s basically a forced savings plan, he says.

Be disciplined

The best way to avoid having too much mortgage debt is not to get it in the first place, says Ms. Lovett-Reid. Don’t get lured into buying the biggest house possible. Choose one you can afford, she says. Put debt reduction targets and deadlines in place. And have the courage to stick to them. Focus on paying off your debts and living below your means so that you don’t find yourself saddled with a huge debt from your mortgage and line of credit when it comes time to retire.

She says people have to ask themselves: “Is my lifestyle sustainable in retirement?”

Because by the time people hit retirement “they want to be channelling any excess cash that they may have – not to mortgage payment, not to a debt – but to a life and an experience instead.”

Any windfall cash should be put towards your mortgage, says Mr. Iriotakis. It’s always nice if a rich uncle gives you a pile of cash, he jokes. But if you get a tax refund, put it towards your mortgage, and make sure you’re maximizing all your tax benefits to get the biggest refund you can.

A way out if you’re buried in mortgage debt

If you are heading towards retirement and still have a significant amount of mortgage debt, you have a few choices to make, says Mr. Iriotakis. You can bite the bullet and downsize by moving to a smaller house or condo, or moving to a cheaper location. “That’s a quick way of getting rid of the mortgage,” he says.

Or, you can refinance your home and take a longer amortization so your monthly payments are less and will be affordable for you on a lower income.

Ms. Lovett-Reid says while retiring with debt isn’t ideal, it can be managed. You can delay your retirement for a few years, or look for a part-time job to have while you’re retired. Retirees can also look at the possibility of a reverse mortgage, or boosting their exposure to equity with the hope that their savings will generate more income over the long term.

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