Is a Mortgage-Free Retirement on Your Horizon?

Retirement-mortgagesWith debt levels up and savings rates down, more people are lugging a mortgage into retirement. But not everyone.

According to a recent CIBC/Harris-Decima survey, mortgage freedom comes earlier than expected for some. Of those polled who successfully paid off their mortgage, they were able to do so (on average) by age 48.

But there’s a bit more to this story, as a separate BMO poll reveals.

According to BMO:

  • Over half (51%) of Canadians expect to carry a mortgage into their retirement years
  • Of the more than three-quarters of Canadians aged 50 to 59 who own their homes, nearly half currently have mortgage debt.
  • The picture improves moderately in the following decade. For those aged 60 to 69, a full 75% own their homes, but a quarter of them are still carrying a mortgage.

TD also weighs in on the senior citizen debt trend. Last fall, it polled workers nearing retirement and found that four out of 10 people expected to make mortgage payments after they stopped working.

So today, the average borrower predicts mortgage payoff by age 55, says CIBC. That’s seven years more than it took current free-and-clear homeowners to eradicate their mortgage.

The why…

Why are amortizations being stretched out? Well, there are more than two reasons, but for one thing home prices (and mortgage size) have risen faster than the income used to pay them.

Moreover, when people got a mortgage 20 years ago, personal savings rates were a mindboggling 4.3 times greater than today. Accordingly, people back then were more inclined to make accelerated payments or prepayments.

Canadian-Personal-Savings-Rate
(Source: Statistics Canada)

Strategies

For those homeowners who were able to pay off their mortgages years before retirement, these are some of the strategies they used (again from the CIBC survey):

  • 52% made lump sum payments annually when they were able
  • 42% increased the amount of their regular mortgage payments
  • 40% increased the frequency of their regular mortgage payments

Of course, being able to use these strategies requires sacrifices along the way. 78 per cent of homeowners who have paid off their mortgages said they did one or more of the following:

  • 53% said they skipped large, “unnecessary” purchases
  • 53% said they relied on a budget to track their spending
  • 49% reduced extra spending, such as on eating out and entertainment
  • 38% skipped vacations

“A key finding in this poll is that Canadians who have successfully paid off their mortgage made some difficult choices about how best to spend their money over the course of their mortgage,” said Colette Delaney, Executive Vice President, Mortgage, Lending, Insurance and Deposit Products, CIBC.

Some of the sting from those sacrifices can be minimized with simple tactics like increasing mortgage payments when you get a raise (See: Inflating your mortgage payments), or using tax refunds for a lump-sum prepayment in the spring.

The takeaway…

Retirement arrives much quicker than most of us envision when we’re young. By making sacrifices now and capitalizing on today’s low rates, homeowners can shave several long years off their mortgage. A little pain now is worth the gain later, because if income drops in your golden years, it makes mortgage payments a much harder pill to swallow.


Steve Huebl & Rob McLister, CMT

  1. Open a HELOC with a negative balance including your mortgage. Use it as your primary bank account complete with online payments and cheques. Deposit money immediately into your HELOC account to pay down your balance and postpone outgoing payments (bills, etc.) to avoid running it up. Withdraw less money from your HELOC than you put into it every month – track this. When you achieve a new low, even if temporary, mark this on a piece of paper with the date.
    Watch your NEGATIVE balance drop monthly as encouragement. Rethink how you view money as you watch your giant negative balance for what it really is – a real lack of money – as in, if you owe someone else, you have no money…even if in another account it has some money in a positive balance.
    This is the most efficient strategy to pay down a mortgage in 5 years or less.

  2. I think you have hit the nail on the head with the ‘sacrifices’. Having grown that vast majority of my life from within the ‘have-not’ status of Saskatchewan, something has dramatically shifted – even prior to the boom.
    People these days simply don’t make the sacrfices they used to. I grew up in a brand-new young neighbourhood full of young families back in the early 80s, and it was different. People weren’t driving brand-new vehicles the way they are now. And vacations were to a nice lake within 2 hours north of Saskatoon, not an annual hot holiday to Cuba/Mexico. You’d see the odd family that was quite flashy with their possessions, but almost everyone else was very grounded. It wasn’t a big deal to drive around a 15 year old truck, have a 60’s/70’s trailer. Those with cabins at the lake were the rich ones. Now it would seem everyone thinks they should get that.
    Whether it be a sense of entitlement, or just sheer hopelessness and living for the day – life is going to be very tough for those who did not choose to make their sacrifices when they were young and able to pay off their homes quickly.

  3. It’s not just about a populace that’s unwilling to make sacrifices. My sense is that the vast majority of Canadians are not living high on the hog. The middle class is struggling with two things that their parents didn’t: 1) high home costs and 2) declining job security and income relative to living expenses. When you add in low interest rates, “paying off the mortgage slower” becomes the only option (not a choice). That’s why governments know they have very little wiggle room with raising interest rates. The only solution that they can hope for is to try to stimulate economic growth so that middle class incomes can start growing again. How the heck you do that without bankrupting the public purse is the Trillion-dollar question.

  4. Retiring mortgage-free is a rather myopic measure of success.
    Does a renter who continues to pay rent after retirement wish to retire rent-free?
    Net worth is what really matters.

  5. I agree. I don’t understand the industry’s obsession with paying off one’s mortgage sooner at current rates. People would likely be better off maxing out RRSP and TFSA contributions than prepaying their mortgages, if they don’t have the income to do both. Even outside these sheltered vehicles, it’s certainly possible to eat the after tax returns of prepaying your mortgage.

  6. Well Ralph, I am genuinely almost borderline “shocked” that we might actually agree on something.
    Imagine that?
    However, I must admit that I believe it is possible to both pay your mortgage down at an accelerated rate, while simultaneously building wealth through other financial vehicles.
    It’s not a question of one or the other, or all or nothing, or… (insert suitable cliche here).

  7. People with good net worth in retirement don’t have mortgages.
    The exception is a HELOC used for investment purposes, but that’s a different kettle of fish.

  8. Not to put too fine a point on it…but a HELOC is a mortgage.
    Legally a charge on title is a charge on title – regardless of the payment agreement (ie. interest only).
    Different kettle, same fish.

  9. However, I must admit that I believe it is possible to both pay your mortgage down at an accelerated rate, while simultaneously building wealth through other financial vehicles.
    The answer is simple. Make enough money and you can do both.
    The problem is when you look at the incomes in this country and the house values, most people won’t be in that situation.

  10. My view is that a paying off ones mortgage quickly might be a good idea for some people… but truthfully as with all financial matters it comes down to the individual situation.
    This is truly a subject were speaking generally with blanket statements about what to focus on, will not get us any where except to appear close minded! Not to mention potentially mislead non industry CMT readers into trying to follow advice not suited for them!
    The stats from this article are alarming and are a great indicator of the poor health of our countries current financial state.
    Income to price ratio’s are way out of wack and thats just the most obvious issue…
    I have met with a number of clients recently whom are in over their head and underwater on their properties… One common characteristic is their mind frames around finances are not reflective of our current economical environment and hold onto past advice that is no longer serving them!
    For one client even though they put 20% down a few years ago and made excellerated payments. They are Looking to sell to use the equity to pay off credit card debt that has accrued… we crunched the numbers and after their massive IRD penalty $35K and $30K+HST Realtor fees mixed with a good 10% drop in Victoria Real estate they walk away with no equity to pay off any cards… Even if they had curtailed spending further and put additional money on their mortgage up until now they would have to sell their home to access it and that currently isnt feesable.
    Some common misconceptions are that your home is a form of savings… this is incorrect! It is either an investment or a shelter but not a form of savings… It would need to guaranteed and fully accessable.
    Not only is the process to become financially successful extremely individual so is the metric to measure success!
    I read a poster in a coffee shop that said “There are 2 ways to become wealthy, 1) Make more 2) Want less”
    These are different times and what worked last time might work out very different this time?? Decide where you fit, make tangible goals, and work with some one or come up with a plan yourself. One thing is foresure financial stress is very unpleasant!! It is the leading cause of marital breakdown… 6 month emergency savings helps a bit!!
    Good luck everyone!

  11. It’s common sense. The cost of trading into and out of a home can easily be $30-50k, plus the possible huge hit your credit rating takes. Even for those who do manage to hang on to the house, they’re stressed, broke and miserable, and their houses generally aren’t maintained and kept up, which reduces everyone else’s property value. Are the positives of home ownership enough to offset the risks in these cases?

  12. People used to be happy to not live under the thumb of a banker. Now they think they can befriend them while “investing” and all that junk. That’s fine, but it’s not the reality. It might take a lifetime of “not paying down your mortgage” because interest rates are so low to find out that it just doesn’t work. Your grandparents knew that they had to be stingy, pay down their debt and expect a moderate retirement. That worked. This other idea to invest with a massive debt obligation is a new method and it’s simply not working for the majority of people. This illusion of low interest rates and not paying off your debt cuts both ways. For it’s the low interest rates driving down secured investments. It’s driving up borrowing and malinvestment in real estate. Even had it gone into stocks, etc. it would drive up prices making their yield skyrocket and so driving down their net gain for investors.
    For the vast majority of people, paying off their mortgage and staying out of debt is all they will ever achieve. It’s time to face reality.
    Get the bankers off your back in a hurry, then invest.
    You have no idea what kind of freedom being out of debt really means.
    If you make $700 a week and had a $1500 a month mortgage payment, you could take 3 weeks off a month. Don’t get too hung up on the math…just think about it.

  13. Great post Island Advisor.
    Even if there is no correction, a flat market will be quite an adjustment for many people. No longer can a house compensate for living beyond your means

  14. If interest rates rise, rates rise on other investments too, but the interest you pay on your debt rises too. If rates rise, the economy is also stronger and you make more money because your job provides raises. These things all balance out. So what? It’s all connected and you’re trying to game a system stacked against you.
    You gotta pay 30% extra taxes on income to pay interest on a loan that’s indexed to the rest of the market. This more than cancels out the benefit of investing while holding massive amounts of debt.
    When you wipe out your $1500 a month in mortgage that’s 18k you don’t have to earn and pay taxes on. That right there is a 35% ROI! 5% interest and 30% taxes. Think about it. Then you get 3 weeks off a month! You know, if you want…it’s an option.

  15. That is easy to say but how do you propose people do that? It’s not just after-tax returns you have to beat but risk-adjusted after-tax returns.
    IMO, mortgage prepayments are the best investment for the majority. Where else can you earn a 4.5-5.0% pre-tax return without risk?
    It’s also an incomparable feeling knowing your home is paid in full. No other investment provides that peace of mind.

  16. Who is going to talk about the biggest hurdle for the majority of homeowners in Canada…
    Emotional Maturity and Conditioning…
    Our society pumps us from a very young age with commercials and ad’s telling us all how better our lives would be if we just had the item they are advertising!
    In my opinion interest rates and investment returns are less important than a plan that fits emotionally and that a family has true buy-in on! If the plan emotionally fits than the urges for consumer spending is curtailed into a affordable range and situations improve.
    Yes some people can use a HELOC to access home equity and get higher returns potentially than the cost of the money to generate more income…
    Some borrowers are better reverse savers and do better by aggressively paying down debt as a way to increase net worth and need the structure of having the money be taken and no longer assessable.
    The Math of the equation is a far second to emotional fit when it comes to a financial plan…
    In my opinion what we need are better examples for our borrowers to base success on, rather than looking backwards at what their parents did in the past! For our parents there were many economical factors that the next generation may not have to assist them.
    How about some TV shows that accually incorporate financial concerns into the sitcom… maybe a show about a recent university grad living their life but a small focus being aggressively paying off student loans before taking on big trips etc.
    Or a family show that entertains us but also has a small focus on balanced saving habits and expense management like the family on TV that drives a 10 year old vehicle to save money (unheard of currently)??
    Shame makes people spend more and save less…
    Lets make saving money cool again!!
    Great posts everyone!!

  17. That’s an interesting paper, but it assumes RRSP/TFSA investments will average inflation+3% over 30 years. There’s never been such a period of crummy returns, though I suppose if you bought an underperforming mutual fund with above average fees, you might hit their target.

  18. Yes I realize that. My point was that your definition of success is based on net worth. Some would view that as myopic.
    It’s a fact that seniors with good net worth rarely have mortgages. That says something. Most Canadians aspire to own a paid-off home by retirement and associate this with success. No one wants to be at the mercy of a bank or landlord at age 65.

  19. There’s also never been a 10 year bond under 2% like we have today.
    History is a weak guide to the future. Anyone who relies on historical North American returns is setting themselves up for potential disaster. A 6% return with a little risk is respectable. 5% with no risk is just as respectable.

  20. How did we get to 5% w/zero risk again? Anyone who’s NOT relying on historical returns is going to retire… how? Anecdotally, I don’t know many who are piling it up fast enough that they’ll live comfortably to 90 with zero or negative real returns on their assets and no employer pension.
    That paper from the CGAs doesn’t hold water. Picture a couple of 35 year olds who just had their first kid, and are planning their second in three years (budgeted for IVF?), each with incomes of $45k, all from wages, no employer pensions and a $315k mortgage. Essentially it’s advice for poor people on how to stay poor. Keep payin’ that mortgage!

  21. I assumed “struggling” = “missing payments to creditors.” Otherwise you’re just house poor.

  22. It is simple mathematics Ralph.
    5% is the pre-tax equivalent return on prepaying a 3% mortgage with a 40% tax bracket.
    Mortgage prepayments entail zero risk because they are guaranteed to save X amount of interest on debt you must repay anyway.
    Forget about historical returns. It’s going to be much harder to save for a comfortable retirement going forward. There is enormous demand for yield and with high demand comes scarcity of returns. Remember that North American is stuck in a mature slow growth economy with long-term inflation anchored at 2%. This directly shapes market expectations.
    For these reasons, the guaranteed returns of prepayments measure up far better in today’s environment than they ever did historically.

  23. To be in a 40% bracket, you’re at $81k+ in Ontario, WAY above the CGA report’s assumptions.
    This demand for yield: I’m not seeing it. All I hear are people whining about how banks aren’t paying interest, governments are setting short rates at criminally low levels, government bonds feature negative after inflation returns, &c. If there was actually a demand for yield, I’d hear more people pointing out that spreads between junk and treasuries is at records, that there’s lots of decent yields in the conservative large cap space and lots of GREAT yields in small cap. People moan that the stock market is a rigged casino and that everything’s going down the tubes (buy gold!), move everything into AAA and cash, stop investing to pay down their mortgages, and in a year or two, when equities are higher and fixed income is lower, they’ll squawk that the rich just keep getting richer (rigged!). About the only equity yields I’ve seen bid up is the larger Canadian REITs.
    The irony here is that the guaranteed return of paying off the mortgage is often layered on top of the risky strategy of having way too much house and leverage in the first place. I’m sure they’ll all be thrilled with their guaranteed 5% layered on top of a $200k decline in house value!

  24. “To be in a 40% bracket, you’re at $81k+ in Ontario, WAY above the CGA report’s assumptions.”
    Then use a 35% bracket. It doesn’t matter. There is still nowhere else to get comparable risk-adjusted returns.
    “I’m sure they’ll all be thrilled with their guaranteed 5% layered on top of a $200k decline in house value.”
    Home prices are irrelevant if you already have a mortgage. People have pay that mortgage regardless, and they have to decide where to deploy excess cash flow regardless.
    This demand for yield: I’m not seeing it.”
    Then you are an unknowledgeable source. Anyone that has been following investments for the past five years knows the premium that investors put on yield today.
    I probably speak for others in saying that you’re uninformed comments on this subject are getting tiresome.

  25. There is still nowhere else to get comparable risk-adjusted returns.
    This is all fine for short time horizons. For people with decades to retirement, the risk is that by playing it safe, you’ve underperformed the long term best performing asset class by several percent. These people don’t need good risk adjusted returns. They need good absolute returns. Lily livered market timers miss the big moves and pile in late, and they underperform.

  26. Great posts all.
    “It’s all connected and you’re trying to game a system stacked against you.”
    Great quote – just like trying to beat the house in Vegas.

  27. Wow! I can’t believe that none of the comments here address the real issues. For one the tax base in Canada is criminal! Run by Criminals. How is it that Federal tax is legal in this country? Sure we all need good roads health care and to take care of our sick to say the least but! The provincial tax is the only form of legal tax we should be paying instead of paying big tax dollars to the feds pensions. Big government = Big bills! and big Scandals. One must first look at the intrusive and illegal Taxation system and then look at the private run banks. Just look at what Iceland did and you will see what I mean. They are thriving after they kicked out private banks. We pay interest on money that doesn’t exist yes its true but you wont here that on the mainstream media. Our financial situation in Canada and other countries run by private banks have a strangle hold on us all. Why is that our employment insurance that we so graciously pay every month is not being put into an investment account towards retirement of each and every individual who pays into it instead of going to general revenue. Think about it for a minute if you contribute your whole working life and never use employment insurance that would equate into massive dollars for retirement years and help off set your financial burdens later on. Im not saying that a lot of us live beyond our means but that our means available if done correctly could help stabilize our economy and quality of life through fairness and honesty. We all are in this together so it should be all of us to educate ourselves and our children to restore order in our financial systems and a runaway government/corporatism.

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