Canadians facing retirement with mortgage debt

A growing number of Canadians are entering retirement still carrying mortgage debt, according to a recent survey. The trend has raised concerns about the financial security of retirees who may struggle to manage monthly payments on a fixed income. Jonathan Anderson was among the first to notice this shift when conducting his financial planning sessions. “We are seeing more retirees with outstanding mortgage balances than ever before. This is a significant change compared to previous generations,” he remarked. Adding to the financial stress, food inflation continues to rise, further squeezing the budgets of those on fixed incomes. It’s a challenging landscape that has many questioning whether they will ever be able to comfortably pay off their debts. While there are no easy answers, some financial experts suggest downsizing or seeking advice on managing debt to mitigate the risk of financial strain in retirement. A generation ago, it would have been unthinkable for many Canadians to carry the mortgage on their home into retirement. But for many on the cusp of retirement now, that’s no longer the case. A survey conducted by real estate firm Royal LePage in May found that around one-third of Canadians expect to continue paying down their mortgage into their retirement years. “Canadians today are much more inclined to carry debt because they’re either working later into their lives or they’ve got some more disposable income that they can utilize to pay these things off down the road,” said Shawn Zigelstein of Royal LePage. Canadians are also buying their homes later in life. People are buying homes later and now they also have the option for a 30-year amortization. That pushes mortgage payments further into what used to be the traditional retirement years,” said Jason Evans, a financial planner specializing in retirement advice. Bloom Financial, which works exclusively with Canadians aged 55 or over, reports that a large portion of its clientele are retirees looking for options to pay down their mortgage. “For 80 per cent of the clients that we speak to at Bloom, that is the situation they’re in,” said CEO Ben McCabe. “Retiring with a mortgage is possible, but there are some pitfalls to watch out for,” Evans advised. He recommends waiting until you’re 70 to start drawing Canada Pension Plan (CPP) benefits. “While starting CPP benefits early can help with cash flow, it means smaller CPP payments for life. Waiting until age 70 leads to higher monthly income and would provide the most value from the program,” he said.

Retirees carrying mortgage debt burdens

Evans also noted that some older Canadians might want to dip into investments to pay off their mortgages, but they need to watch the markets carefully. “A mortgage means higher monthly expenses in retirement. To cover those costs, retirees may need to take out more from their investments. That can work when markets are strong, but during a downturn, it might force them to sell at a loss just to pay the bills.” The problem some Baby Boomers face is a significant gap between their home’s value and the amount of liquid cash they hold. “They’ve never earned more than $30,000 or $40,000 a year in their career, but they’re sitting on a $2-million home,” McCabe said. One option to get some cash in hand is a home equity line of credit (HELOC). However, McCabe cautions that a HELOC might not be suitable for those already well into their retirement. It’s a better solution for younger people who have employment income and can service the interest payment,” he said. A financing option available almost exclusively for Canadians over 55 is a reverse mortgage. “A reverse mortgage is a loan against one’s home. The key difference between a reverse mortgage and any other kind of financing option is that there are no monthly payments. The loan isn’t due until you pass away or sell your home,” McCabe explained. Many older Canadians use their reverse mortgage to replace their primary mortgage. “Effectively, you’d be replacing a mortgage that has a monthly payment obligation with a mortgage that doesn’t have one,” McCabe said. According to the Royal LePage report, opinions on downsizing are mixed. About 47 per cent said they don’t plan to downsize within two years of retiring, while 44 per cent said they do. The most popular downsized dwelling was a standard condominium. “Downsizing can be a good option for some. However, it can sometimes be challenging to find a suitable next home at a lower price point,” Evans said. “Moving to a new area is often required to free up a meaningful amount of equity. If downsizing is part of a person’s retirement plan, it’s important to keep an eye on the real estate market and consider a few different housing options. Careful planning and understanding the available options can help Canadians manage their finances effectively as they approach and enter retirement.