How to navigate retirement with a mortgage

Retirement is a time for relaxation and enjoyment after years of hard work. But an increasing number of Canadians are entering this phase of life with a mortgage to pay off. According to the latest census data from Statistics Canada, the number of people age 65 or older who still have a mortgage increased from 1.2 million in 2016 to 1.5 million in 2021.^1,2 This is due in part to many factors like Canadians purchasing homes later in life and having longer mortgage terms; refinancing their homes to help their children or make large purchases; or buying a cottage or second property to enjoy during retirement.

As we live longer and work into our later years, the reality of managing a home loan after retirement is becoming more common. But there are strategies that can help you handle a mortgage in your golden years, so you can enjoy retirement with confidence.

Retiring with a mortgage

Retiring with a mortgage presents some unique challenges and opportunities that require careful thought and planning. First and foremost is figuring out how to handle your monthly mortgage payments on a fixed income. Having a plan and being ready to adapt it if needed will go a long way in helping you pay your mortgage while enjoying retirement.

Considerations for managing a mortgage in retirement:

1. Budgeting

As you prepare to retire, build a budget for what your spending will look like. Be sure to include all your regular fixed expenses, like bills and your car payment if you have one. Your mortgage payment will also be a line item here. With a clear outline of your fixed expenses, you’ll be able to easily see what’s left over for having fun and maintaining a comfortable lifestyle – while also being ready for life’s surprises.

2. Mortgage payoff strategies

There are a few different strategies for handling a mortgage in retirement, depending on your unique situation.

If your goal is to stay in your home well into your retirement and you want to pay off your mortgage as quickly as possible, it might be a good idea tackle your mortgage more aggressively as you approach retirement. This way, you'll have less to pay off once you retire. There are a couple ways you can do this:

• If your mortgage comes with prepayment privileges, consider making extra lump-sum payments or increasing your regular payments.
• You may also want to consider a mortgage accelerator program. With this type of program, you finance your mortgage with a home equity line of credit. Your paycheque is then deposited into that line of credit account. You can withdraw your monthly expenses against the line of credit, and then whatever’s left at the end of the month goes to your mortgage. These programs may help you reduce your mortgage principal faster and minimize interest.

Here’s another scenario. You might already own your home and have your mortgage paid off, but you’ve been saving to buy a cottage or vacation home to enjoy during your golden years. When it comes to paying down that second home, it might make sense to use a mix of your savings, smaller mortgage payments and life insurance that passes along the property to the next generation seamlessly. A scenario like this calls for careful consideration of how achieving this lifelong dream fits into your financial situation. If this is you, let’s talk. I’m here to help you figure out the best path forward.

3. Income sources

Retirement income in Canada can come from several sources, including:

• Part-time income, if you plan to keep working
• The Canada Pension Plan (CPP)
• Old Age Security (OAS)
• Company pensions
• Registered Retirement Income Funds (RRIFs) and Lifetime Income Funds (LIFs)
• Other investment assets

The important thing to think about when it comes to your income sources and assets is how to make them work for you. For example, if you have other investment assets that you aren’t using to generate retirement income, does it make sense to start using those assets to help pay your mortgage, or pay for a trip or big purchase? Or is it better to stay invested and allow those assets to grow? Deciding what to do can be tricky. I can help outline the impacts of each option, so you can make an informed decision.

You’ll also want to think about taxes. If you plan on making larger withdrawals from your savings to cover your housing costs, a dream vacation, or that boat you’ve always wanted, this will count as taxable income. If your income is high enough, the government may ask you to return some or all of your OAS payments.

4. Mortgage refinancing

Refinancing your mortgage involves re-negotiating your existing mortgage. You may choose to re-finance if you’re focused on paying off your house and currently have a fixed rate mortgage at a higher interest rate, but interest rates have since dropped and you want to take advantage of a lower rate. You can also refinance to tap into your home equity and access it as cash.

Refinancing is a big decision that you should consider carefully. It may lower your monthly payments, secure a reduced interest rate, or free up your cashflow, but is it worth extending the term of your home loan? Only you can answer this question. If you’re considering refinancing, reach out and let’s talk. I can help you weigh the pros and cons to make the decision that’s right for you.

5. Reverse mortgages

A reverse mortgage allows you to convert part of your home equity into cash. Instead of paying your mortgage, a reverse mortgage pays you, using the equity you’ve built over year of making mortgage payments. You can get the money in a lump sum, in monthly payments, or access it as a line of credit. While a reverse mortgage can boost your cash flow to help you manage your finances more comfortably or relieve immediate financial concerns, it's important to understand the implications. Reverse mortgages aren’t available to all homeowners, come with considerable fees, and can affect the value of your estate.

A reverse mortgage is a little bit different than refinancing your mortgage. Think of a reverse mortgage as simply unlocking the equity in your home as cash. Meanwhile, mortgage refinancing is taking out a new loan to pay off your old loan. While you may be able to access cash as part of a mortgage refinance, you’ll have to pay that cash back as a part of your new mortgage.

6. Downsizing or renting

Downsizing to a less expensive home can significantly reduce or even eliminate your mortgage debt and even free up cash so you can experience some of the things on your retirement wish list. Selling your home and becoming a renter can help do the same. Depending on where you rent, you might also be free from other home ownership obligations, such as cutting the grass and shoveling snow – potentially a win-win!

Next steps: Create a plan to manage your retirement finances – including your mortgage – with confidence

If you’re retiring with a mortgage, you’re not alone. Managing a mortgage during retirement requires thoughtful planning, but is very doable. Before you make any decisions about how to tackle your mortgage in retirement, it’s important to take a look at your full financial picture.

We're here to help. Reach out and let’s discuss which options and strategies are right for you. Together, we can craft a plan that secures your financial future while making the most of your golden years.

Sources

1. Statistics Canada, 2016 Census of Population, Statistics Canada Catalogue no. 98-400-X2016235.
2. Statistics Canada, 2021 Census of Population, Statistics Canada Table 98-10-0250-01.