Mortgage & Retirement

Having a mortgage during retirement adds a hefty bill to a post-employment lifestyle. As a result, many people seek to pay off their mortgages entirely prior to retiring. Here are three questions to ask yourself when determining whether paying off your mortgage early is a good strategy for you.

What are the Rates of Return?

One way to evaluate the decision to pay off your mortgage versus keeping more of your money in savings is by comparing the rates of return you expect to earn by following each path. Should you choose to pay off your mortgage, your rate or return is certain; you "earn" the interest rate charged on your mortgage.

If you instead choose to save the money, your rate of return may vary considerably. Your expectation will be determined by how you choose to invest. If you choose to invest very safely, like in a savings account, your rate of return will be quite low, likely below that of your mortgage. If you choose to invest more aggressively, you may very well earn a higher return, but will do so at a cost of significantly more risk and greater uncertainty.

What About the Home Mortgage Interest Deduction?

With every home payment you make, you might benefit from a mortgage interest deduction. However, the benefit of the home mortgage interest deduction may be less than you think, since:

• Your tax rate may be lower than ever - Since you’re in retirement, you’re not working, lowering your income, and lowering your income tax rate.
• Your payment consists of more principal and less interest.
• Each successive mortgage payment is comprised more of principal and less of interest, reducing the size of your deduction on your tax return.
• Your other itemized deductions are probably lower too.
• Because you’re in retirement, you’re probably paying less state income tax. Since you only receive a tax benefit to the extent your itemized deduction exceeds your standard deduction, this means you get less of a tax break from your home mortgage payments.

Would You Prefer No Bill or No Cushion?

While it may be of comfort to avoid a mortgage bill every month, you don’t want to pay off your entire mortgage if doing so would leave your without any savings cushion. You’ll never want to pay down your mortgage only to find that you can’t afford to pay for an unexpected car or home repair without going into credit card debt. Ideally, you could pay off your mortgage and have significant savings remaining. Regardless, make sure you retain an emergency fund in retirement.

4 reasons to pay off your mortgage before you retire

Does your mortgage term extend past the date you want to stop working? You might want to reorganize your finances and pay it off sooner. Here's why.

With housing prices skyrocketing and 30-year mortgages available to homeowners, more and more Canadians will be paying off their home well into retirement. If you’re still making a decent living in your 60s and 70s, then that may not be a problem. But for people who actually want to retire, having a hefty monthly payment to take care of can be trouble.

Ideally, you want your mortgage paid off by the time you leave the workforce. Here’s why.

1. Mortgage payments are large - As housing prices go up, so do monthly mortgage payments. Just imagine how much money you’d have if you didn’t have to pay a mortgage. Now imagine paying that monthly amount and not making any income. Scary, right? You don’t want to have to worry about finding a few thousand bucks a month to pay for your house when you’re not bringing in a paycheque.

2. RRSP withdrawals aren’t the answer - You’re probably thinking you can withdraw money from your RRSP to make those payments. Well, besides the fact that the point of saving all that money during your career was so you could enjoy retirement, in order to pay the mortgage you’ll actually need to take out more money than you might think.

When RRSP savings are withdrawn, you have to pay tax. It’s the after-tax dollars that will be used to pay down your debt. Theoretically, you could have to remove $3,000 to make a $2,000 payment.

3. You know what you’re getting into - There’s always a debate around paying off a mortgage versus investing in an RRSP. A lot of experts recommend concentrating on the mortgage first because it’s easy to see what’s happening. You have a set rate and you can see the balance dropping. With investing, the rate of return is unpredictable. Aggressively pay down the mortgage first and then use all that extra cash for retirement savings.

4. You’re building equity -  Not only does a mortgage-free retirement give you a lot of extra money to spend in your golden years, but if you need cash to fund something -- maybe a major medical issue, or you want to buy a small condo -- you can sell the house. If the mortgage is paid off you’ll get all the proceeds from the sale.

Retiring mortgage free doesn’t always make sense -- having a large pension, if you're so lucky, could make those payments manageable -- but generally, it’s better not to have such a huge debt when you stop working.

 

 

Source:  Rob Carrick