Is Your Home Turning from Asset to Burden? The Debt Dilemma for Retirees

The concept of good debt and bad debt is one that is well known to many investors.

Good debt can be broadly classified as applying to investments which broaden exposure to an asset class such as property or shares and allow for interest payments to be tax deductible, while bad debt applies to things such as credit cards and personal loans for cars and other depreciating consumer assets.

Debt on your principal place of residence is often also classified by some (but not all) as good debt.

While such debt is not tax deductible, housing prices generally rise over time, debt is gradually paid down, capital gains tax doesn’t apply to a principal place of residence, and the occupying investor has the advantage of having a roof over their head and no exposure to rising rents.

Can housing debt turn bad?

That inclusion of debt on a principal place of residence as “good” is starting to waver back towards entering the “bad” debt bracket, as more and more people approach retirement with housing debt that is a major drag on their ability to retire well.

It is not hard to see where the problem has come from, as property prices have risen much faster than wages, delaying many people from entering the property market or upgrading their property, while the ensuing high prices plus interest ensure that mortgages become much harder to pay off over time.

The number of retirees who own their home outright has now halved in the past 20 years, according to census figures, which is quite a dramatic change.

At the same time, the proportion of over-65 households with a mortgage has more than tripled, which is also quite an alarming change.

Real trouble if housing debt is higher than super

These numbers are very discouraging, particularly in some emerging cases where people are reaching retirement age while their mortgage debt is still greater than the amount they have within superannuation.

This may be because of divorce, illness, the death of a partner or even to using equity within the home loan to help out children or to spend on travel or other depreciating consumer goods.

Housing debt greatly complicates retirement planning

Even if the remaining mortgage debt is lower than the amount held in superannuation, it is still something of a financial planning nightmare, given that one of the major assumptions of the Australian retirement system is that retirees will be debt free and own their own house when they stop working.

That assumption is looking increasingly out of date now as wannabe retirees and financial planners try to navigate a scenario of retiring with a significant mortgage or renting a home.

It can be a very difficult scenario to plan around too, with the main choices being to clear all or part of the mortgage using the super fund or fund mortgage payments from superannuation income.

In general terms, a superannuation retirement account will usually outperform the interest rate on a mortgage, although this may not be the case in any given particular year or even for a number of years.

So, juggling retirement and a mortgage can be something of a gamble and can leave a retiree really struggling on a limited income or drawing down on their superannuation more quickly than anticipated.

Over 60’s are already struggling

Housing costs are now by far the leading reason for over-60s to contact the National Debt Helpline’s chat service, with a third of callers struggling to meet mortgage payments, council rates, rent, or strata costs.

Financial planners also report that many potential retirees are delaying their retirement – sometimes for many years – due to the pressure of continuing mortgage payments.

Overall, the impact of increasing debt stress on retirement looks set to get worse over time as property prices continue to climb faster than wages, leaving younger generations to delay getting into the market and to take on massive and hard-to-reduce mortgages if and when they eventually take the home ownership plunge.

Ideally, debt levels are an issue that should be examined very carefully once people hit their late 40s and early 50s, while there is still a chance to make further inroads into mortgage debt, while income is still strong and living costs may be a little lower.