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By Amy Hamilton-Chadwick, Freelance writer and registered FA
Are you on track to have paid off your mortgage by the time you retire? An increasing number of Kiwis are facing the prospect of retiring with money still owing on their homes – and paying a mortgage when you don’t have an income can put a serious dent in your lifestyle.
“It used to be that you’d pay off your house, then save for retirement,” says Lynda Moore, ‘The Money Mentalist’, an accountant who has also studied psychology. “Now, by the time you’ve paid off your house you’re potentially retired. We’re in a situation our parents never had to worry about.”
So what can you do to avoid this situation, in the years of work you have left?
Pay off your loan more quickly
If you are staring down the barrel of a mortgaged retirement, ideally you need to pay the debt off faster. That may mean putting more money into repayment, though a smart restructure can be surprisingly effective.
“When you have a few more years up your sleeve, start looking ahead – don’t bury your head in the sand,” says Lorraine Wetzell, Kiwibank mobile mortgage manager and Qualifying Financial Entities Adviser (QFEA).
“Run the numbers. Can you increase your regular repayments to fit the term remaining [if on a fixed term]? Our customers can repay up to 5 per cent extra a year on a fixed loan without penalty, or if you’re not able to do that, make whatever additional lump-sum repayments you can. Then when you come off your fixed term, you can make changes.”
And you get a gold star if you’re also paying as much as you can into KiwiSaver and investing to create some form of passive income, adds Moore.
Strategies for staying put
Joint ventures with their children, subdividing and building minor dwellings – retirees are using a range of strategies to generate cash and pay down debt without downsizing. If you’d like to take on this kind of project, think ahead: will you be able to maintain a mortgage once your wages stop?
“Clients plan to subdivide, do a build, then have the option to rent or sell,” says Wetzell. “I ask them: ‘How many more years will you be earning what you’re earning?’ To build a home you can be looking at [borrowing] $450,000 at least. If you are only working for another six years, there are going to be big serviceability questions.”
There are also reverse mortgages, which can be “quite useful or they can be quite scary”, says Moore. “Some are OK; some of them will burn you. If you’re in that situation, look at downsizing – it’s a bitter pill to swallow if you’re living in an area you love, but what are you going to live on?”
Cashing up, moving out
Moore’s parents moved from Auckland to Whangamata 20 years ago, and she admits she thought they were making a mistake, “but now Mum’s so busy I have to book a time to have a phone call!”
Moving to an area with more affordable housing can give you a mortgage-free house for life and a substantial chunk of cash to live on.
Wetzell’s clients have downsized their homes several times and moved from Auckland to Northland, Orewa, Hamilton, Tauranga, and beyond. She says some do try to downsize within Auckland but it’s “extremely challenging”. A nearby low-maintenance townhouse may not be worth much less than a more dated family home.
For the enthusiastic planner, buying a rental property that doubles as your future home can be a smart choice. With 10-plus years in hand, you can rent it out and have it paying for itself while simultaneously making capital gains in your home.
Then you can sell your home and retire to your rental, hopefully with a substantial lump sum left over, says Moore.
“It comes down to a number-crunching exercise and knowing what you’re going to need or want in retirement.”
It’s well worth paying a financial adviser for personalised guidance, Moore says, though she points out that you also have to follow that advice, which is the hard part. And your partner or family will also need to be on board.
“It’s not one-size-fits-all,” Wetzell says. “You need to start talking and having that planning conversation. It’s not advisable to leave it to the last minute.”
The changing face of Kiwi homeownership
It’s surprisingly easy to end up retired with a home loan: take out a $500,000 mortgage when you’re 45 on a 30-year term at 5 per cent, and you’d still owe more than $250,000 when you turn 65. A 2015 report found that just under a third of borrowers were forecast to still be in a mortgaged home by the time they turn 65.
This reflects our different housing market and lifestyles compared to past generations:
•. Housing is less affordable: in 1998, 11 per cent of households spent more than 30 per cent of their disposable income on housing costs. By 2015, that number had risen to 28 per cent of households.
•. The average age of a first-time homeowner in 1970 was 25; that is estimated to have risen to the mid-30s.
•. Terms are typically longer: just a decade ago, borrowers usually started with a 25-year term. Now they usually start with a 30-year term.
•. The number of mortgage-free properties has decreased from 39 per cent to 35 per cent between 2006 and 2016.
MyValocity.co.nz; Parker, Tamsyn (September 1, 2014), ‘Are you too old to get a mortgage?’, NZHerald.co.nz; Statistics NZ; Stock, Rob (October 4, 2015), ‘A third of Kiwis will have a mortgage at 65’, Stuff.co.nz.
Downsizing: Downsizing your home is most commonly associated with empty-nesters and retirees looking for smaller homes to live in after the kids have moved out.
Reverse mortgage: A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold.