Retiring with a mortgage: The new reality for many Australians

There is an issue that has worried me for some time... Given much of the property market conversation focuses (understandably) on the increasing challenges first home buyers face, it's one that often gets missed.

But it's affecting many more Aussies than you may realise- and the numbers are likely to worsen in the coming decades.

The outcome? Financially precarious at best, devastating at worst. And that is, the issue of how many Aussies are retiring with a mortgage.

Now the word 'mortgage' literally means 'death pledge' - but few people take on a mortgage actually thinking they will still be carrying it into their 'third-act', as Jane Fonda so aptly described retirement in Sydney this week.

The third act is the time for all the things you were too busy, or too tired, to do when you were working. Time for coffee catchups, art lessons, play dates with the grandkids, a spot of golf, community work, travel... whatever your retired heart desires.

I've seen thousands of retirement bucket lists - not one has ever included "still be in debt". Yet, according to the latest CFS Rethinking Retirement Report almost one in four (22 percent) are using their pension payments to service debt in retirement and most Aussies over 50 can't see themselves achieving a comfortable retirement. Now that deserves some attention.

Why is it happening?

There's no single cause - but there are some big ones.

People are buying homes later. The average age of a first-home buyer today is about 36 years old. If they buy their forever home (unlikely) and never refinance their 30-year term, they should have it paid off just before the new retirement age of 67. However most people's first home is not their last. As they change homes to adapt to their changing needs, that 30-year clock restarts... meaning many are/will find themselves well into retirement age when the mortgage is paid off.

Refinance Trap. I'm big on avoiding the loyalty tax, which simply means getting your mortgage broker to shop around to make sure you're getting the best deal. But beware, if you do this and you restart your 30-year term over and over again, with no additional repayment plan, you'll push out your debt free date further and further out.

Releasing equity. As property prices increased, many used their increased equity position to pay for renovations, repairs, car upgrades or a family holiday - further increasing the debt and pushing out the mortgage-free date (unless additional repayments were made).

Divorce, career changes and financial setbacks often mean refinancing or restarting loans later in life. Others tap into their redraw or equity to help adult children buy homes, support grandkid's education or cover other large life costs.

And then there were some who favoured rolling over interest-only loans that never paid down any of the principal on their home.

The numbers are concerning

Census data shows outright home ownership among Aussies aged 55 to 64 years dropped from 63.9 percent in 2000 to just 36.1 percent in 2020.

A survey of 52,000 Aussies by Digital Finance Analytics last year revealed the number of older borrowers who had planned to retire, but then changed their mind due to mortgage debt, doubled in just one year.

The average loan balance in this group? $190,000. But some owed closer to half a million.

Alarmingly, three-quarters of retirees who still had a mortgage said their debt amount was higher than their total super balance.

Surely this isn't the retirement we were promised? The one many dreamt about after a hard day/week/month or year at work... and yet we must be clear, this is the one many are walking into.

These sobering insights should have us step back and ask hard questions about retirement more broadly. Is it possible? By when? Will my body be able to work longer if needed? Am I ok to still have a mortgage in retirement? Practically, how will I fund it and put food on the table? What alternative options do I have?

Retirement is no longer a clean, debt-free line in the sand. It's increasingly a blurry phase, by necessity rather than choice.

Now, there is an argument that as medical technology advances and our life expectancy increases, the retirement age will keep being pushed out. Maybe scientists will find the elusive Philosopher's Stone and thus, delaying retirement and working longer to clear the mortgage won't be that bad? There is good evidence that staying connected to a job is good for your mental health, but ideally, it's an option to take because you want to, not because you have to. There's a big difference there.

What about using the family home as a financial asset?

Downsizing is one option - for many it's not the preferred one. Selling up is not, in itself, without costs and not all of them financial... Vanguard's How Australia Retires research found that only 7 percent of retirees see their family home as a source of retirement funding - either through equity release, reverse mortgages or selling. For most, the family home isn't just a financial asset. It's their sense of stability, security, community and their legacy to support the next generation.

That's why so many are choosing to carry the debt and find other ways to make the numbers work.

A more fragile retirement

Carrying debt into retirement without a doubt adds additional financial stress at a time that's supposed to feel secure and free. Repayments eat into superannuation and pensions. Interest rate changes can cannibalise cashflow. And unexpected costs - from medical needs to home repairs - suddenly feel much heavier when there's less room to move.

Vanguard's research also found that:

• Nearly 1 in 5 retirees are renting
• Almost 1 in 3 working Australians expect to carry mortgage debt into retirement
• 1 in 2 Australians don't know if their money will last
• 40 percent have no clear retirement plan

There's even a new term for the anxiety: FORO - The Fear Of Running Out.

We finance nerds call it Longevity Risk - and I think that fear is entirely justified. There is not only the financial burden, but also the emotional one. Many feel shame for still having a mortgage, the financial stress they thought would be gone by the time they hung up their work boots, is still hanging around the house like a bad smell. Many are worried to spend, or say yes to something they have long looked forward to. That is a heavy weight to carry in your golden years.

What does this mean for my generation?

If this is the reality for Baby Boomers, who largely bought into the property market when it was still affordable, what does that mean for Millennials like me and Gen Z?

The answer is sobering.

With many young Australians entering the market later, with considerably larger mortgages relative to income, far less certainty around job security and low wage growth, it pains me to say that this is an issue I see affecting more and more in the future.

According to Vanguard, 29 percent of Millennials who expect to own a home believe they'll still be paying it off in retirement. And we cannot forget that given the huge increase in property prices, there will be many who will never buy a home to live in at all. Renting for life will practically mean there needs to be considerable retirement income to afford rent and other living costs.

It's becoming clear: retirement in the future may look radically different than previous generations.

More of us will need to plan for longer working lives, be open to different housing options, or creative retirement income strategies. We need to stop assuming that a mortgage-free home in retirement is the default for everyone.

This shift doesn't mean retirement is doomed. But it does mean we need to face reality and prepare accordingly.

The sooner the better - so your third act can be the encore you envisioned, not a Greek tragedy.

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Jessica Brady is a qualified Financial Adviser and leading money expert. She is on a mission to educate and empower everyday Australians to be better with money through her online money programs and via the Financially Fierce Podcast. You can learn more at jessicabrady.com.au

This article is general advice only, all of the comments above do not take into account your objectives, financial situation or needs.

Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. Jessica is licenced through Paragem Pty Ltd - AFSL 297276. ABN 16 108 571 875, Authorised Representative Number 001259972.