More people are retiring with high mortgage debts. The implications are huge

Implications for physical and mental health ‘huge’, say experts.

house worries

Rachel Ong ViforJ, Curtin University and Gavin Wood, RMIT University

The number of mature age Australians carrying mortgage debt into retirement is soaring.

And on average each mature age Australian with a mortgage debt owes much more relative to their income than 25 years ago.

Microdata from the Bureau of Statistics survey of income and housing shows an increase in the proportion of homeowners owing money on mortgages across every home-owning age group between 1990 and 2015. The sharpest increase is among homeowners approaching retirement.

More mortgaged for longer
For homeowners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14% to 47%.

Among homeowners aged 45 to 54 years, it has doubled.


Source: Authors’ own calculations from the Surveys of Income and Housing


Meanwhile, the average mortgage debt-to-income ratio among those with mortgages has pretty much doubled across every home-owning age group.

In the 45-54 age group the mortgage debt-to-income ratio has blown out from 82% to 169%.

For those aged 55-64 it has blown out from 72% to 132%.


Among mortgage holders. Source: Authors’ own calculations from the Surveys of Income and Housing


Three reasons why
The soaring rates of mortgage indebtedness among older Australians have been driven by three distinct factors.

First, property prices have surged ahead of incomes.

Since 1970 the national dwelling price to income ratio has doubled.


Prices and wages in 1970 are assigned an index of 100. Sources: Treasury, ABS, Committee for Economic Development of Australia


Despite weaker property prices, the ratio remains historically high. This means households have to borrow more to buy a home. It also delays the transition into home ownership, potentially shortening the remaining working life available to repay the loan.

Second, today’s homeowners frequently use flexible mortgage products to draw down on their housing equity as needed for other purposes. During the first decade of this century, one in five homeowners aged 45-64 years increased their mortgage debt even though they did not move house.

Third, older homeowners appear to be taking on bigger mortgages or delaying paying them off in the knowledge that they can work longer than their parents did, or draw down their superannuation account balances.

Super could be changing our behaviour
For mortgage holders aged 55-64 years, there is evidence to suggest that larger debts prolong working lives.

In 2017 around 29 per cent of lump sum superannuation withdrawals were used to pay down mortgages or purchase new homes or pay for home improvements, up from 25 per cent four years earlier.

In the Netherlands, where a mandatory occupational pension scheme along the lines of Australia’s super scheme has been in place for much longer, over one-half of homeowners aged 65 and over are still paying off mortgages.


The base is the total number of uses of lump sums rather than the number of people taking lump sums. ABS 6238.0 Retirement and Retirement Intentions


The implications are huge
Internationally, studies have found that indebtedness adds to psychological distress. The impacts on wellbeing are more profound for older debtors, without the ability to recover from financial shocks.

Debt-free home ownership in old age used to be known as the fourth pillar of the retirement incomes system because of its role in reducing poverty in old age. It allowed the Australian Government to set the age pension at relatively low levels.

Growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to boost the Age Pension.

Mortgage debt burdens late in working life will also expose homeowners to unwelcome risks, as health or employment shocks can ruin plans to pay off their mortgages.

During the first decade of this century, around half a million Australians aged 50 years and over lost their homes.

Taxpayers will be under pressure to help
Those losing home ownership are often forced to rely on rental housing assistance. Moreover, as older tenants they are unlikely to ever leave housing assistance. This will put pressure on the Government to boost spending on housing assistance, which is likely to further boost demand for housing assistance.

Super and government housing assistance could become the safety nets that allow retirees to escape their mortgages.

It wasn’t the intended purpose of superannuation, and wasn’t the intended purpose of housing assistance. It is a development that ought to be front and centre of the inquiry into the retirement incomes system announced by Treasurer Josh Frydenberg.

It is a change we’ll have to come to grips with.

Rachel Ong ViforJ, Professor of Economics, School of Economics, Finance and Property, Curtin University and Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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    COMMENTS

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    Old Man
    13th Jun 2019
    12:11pm
    What is not shown, and could be important, is where the homes are and whether the owners plan to sell on retirement. Real estate agents have always pushed the idea that buying a bigger home when the repayments can be afforded with the view to selling on retirement and moving to a smaller property is a good way of saving. The family home is exempt from CGT so the profit can be used to increase super or allow a better lifestyle.
    jackie
    13th Jun 2019
    1:11pm
    Old Man, downsizing, moving further out or sharing with friends or family members could be an option too.
    Arvo
    13th Jun 2019
    1:25pm
    In many poor financial circumstances it's the only choice.
    see all.Maryakate
    13th Jun 2019
    12:25pm
    Mortgage costs don't go up as property price increases. People buy property to live in while they are in the workforce, hoping the mortgage will be paid out before they retire. Called planning. Most people don't wake up suddenly and find they have retired with a big debt, do they? The only way you could still have a mortgage at retirement would be a marriage breakdown, ill health.That's why most people stay working a bit longer to pay off their existing debt. Why retire if you are in debt?
    KSS
    13th Jun 2019
    12:45pm
    "The only way you could still have a mortgage at retirement would be a marriage breakdown, ill health."


    Or because they deliberately increased the mortgage (either by upsizing or renovating) to reduce assessible assets.
    TREBOR
    13th Jun 2019
    9:14pm
    Is a mortgage taken into account when a person is subject to the assets test?
    Arvo
    13th Jun 2019
    1:22pm
    It all depends when and where they purchased their home and how much they mortgaged. If they purchased in 1992 with a 10% deposit their mortgage balance will not be that great a debt and even if they sell in 2019 in the lower value of the market they are still ahead plus their superannuation. If they purchased 10 years ago then things get little bit tougher if there is only a single income earner.
    for example, had they sold in 2016 they probably would have been better off by approximately $200,000 after mortgage repayment and other associated expense. but, as I mentioned, it all depends on when,where and how much they mortgaged. If they can't afford mortgage repayments they have sell out in the current depreciated R/E market and swallow the loss. Better to sell before the bank takes possession.We all make good and bad choices in life.
    WTF
    13th Jun 2019
    1:45pm
    So... if the value of the home is included in a future pension assets test, the size of any residual / outstanding debt on that home (asset) would need to be taken into account by Centrelink when determining the net value of the asset to the asset holder (at any given time) ..... and the value of the interest paid so as to furnish the debt on the asset would need to be deducted / offset from any other income earned from other income producing asset in a corresponding period........ I guess a new Centrelink Division is born to monitor, maintain and manage that...
    TREBOR
    13th Jun 2019
    9:18pm
    That's one bugbear about the whole (silly) idea of including the family home in assets test.. the need to offset mortgage payments etc. The whole thing becomes too unwieldy and falls over of its own inability to work out accurate figures - which would, as usual, leave the field wide open to (gasps) deeming ....
    Arvo
    14th Jun 2019
    5:15am
    They don't offset your credit card or personal loan debts nor home maintenance expense , so don't count on mortgage debts being offset.
    bullfright
    13th Jun 2019
    1:46pm
    I got my first mortgage when I was 21 years old. I am now 81 and still have a mortgage but I only owe 124 G. If I can make it to 85 I will be finally mortgage free. BUT life is good and I get all my income in pensions from Canada and the UK. I could never afford a holiday but I don't seem to struggle with finances. I don't think I would like to rely on the Aussie pension system.
    Arvo
    14th Jun 2019
    5:19am
    Logic says you are not still on your first mortgage.
    Cowboy Jim
    13th Jun 2019
    2:35pm
    Retiring with a mortgage and relying on Centrelink is rather stupid; good idea though if the kids are there to pay for it since they are getting the big house. If not, stay debt free and enjoy what you have while alive. Downsizing and moving further out is not good either when you lose your licence. Do not be too proud to live in a smaller place without a mortgage. Remember the rates will go up again.
    TREBOR
    13th Jun 2019
    9:21pm
    As Marykate said, Jim - in some cases misfortunes of life cause a mortgage in retirement. The ex for whom I'm carer had a husband die and their business follow - I've hit the divorce/injury/illness trail - and it ain't fun to rebuild time and again.

    The ex and I downsized due to her disability needs, but up-marketed and moved closer to facilities for her - does that make us cheats? We retain a mortgage ..... have to.
    TREBOR
    13th Jun 2019
    9:24pm
    P.S. I'm not suggesting you said anyone was a cheat - but some have.... I'm sure there are some out there who quite willingly upmarket to get a better pension deal, and some with assets hiding in blinds* who cop full pension as spending money, but each case needs to be looked at individually.

    * No-no ... ees not my block of flat - my son own! Just I collect rent for him.... he on holiday ...
    TREBOR
    13th Jun 2019
    9:27pm
    As I said before long ago - this is partly why the ATO is viewing family businesses and trusts etc with a jaundiced eye... Labor, of course, made a public statement about these, and copped a few holes through the hull for doing so... and a few hits on the superstructure...

    Too many people apparently living on nothing while living the life of Riley... changes have to come...
    Chris B T
    14th Jun 2019
    12:14pm
    When taking out These Loans it would be Your Responsibility To Make Sure That
    1 You can afford all the costs involved, not just Loan Repayments.
    2 Job security and Earning Enough To Meet All Costs
    3 Consideration for Length (Time) Of Loan and Time Line To Retirement.
    4 Will this Property be Suitable After Retirement
    5 Lending Criteria Meet, Honestly Followed and She Be Alright or The Future Will look After
    It's Self isn't Part Of Your Decision.
    Then the Loan Adviser Should Be Only Checking The Lending Criteria and Suitable Property to give a loan.
    You are the one who Requested The Loan to Purchase The Property.
    Dreaming and Reality your Choice.


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