Is your (mortgage) holiday nearly over?

Whether you’re in Victoria and looking forward to lockdown restrictions easing, or elsewhere across Australia, 2020 has been a challenging year. It’s affected physical and mental health, impacted financial markets and retirement savings, and meant that many older Australians have become quite isolated.

On top of all this, the last thing you need is added financial stress.

However, according to Amara Haqqani, Director of Strategy and Insights at actuarial firm Milliman, approximately 36 percent of Australians are taking a mortgage into retirement. This transforms an asset into a debt – once that can eat into retirement savings. Retirees do one of two things; if they have enough super to cover the mortgage, they withdraw a lump sum and pay it out. Alternatively, they continue to service the mortgage with their retirement income.

Either way, carrying a mortgage into retirement can have a significant impact on funding.

Figure one illustrates the average home loan by age. A retiree drawing the minimum pension from superannuation and receiving a full Age Pension will struggle to experience an ‘adequate’ retirement lifestyle, as defined by the Association of Superannuation Funds Australia, while servicing that debt.

Figure one: Average home loans by age

Source: Mortgage Nation – The Great Australian Debt, Illion, February 2020

Mortgage risk in retirement

The negative impact on retirement cashflow is only one of the risks. What happens if you can’t meet repayments? Figure two shows delinquency risk per age group – you will see it increases for those aged 71+.

This data pre-dates COVID and the financial uncertainty the pandemic has delivered. It’s undoubtedly higher given the number of people who have lost jobs and the impact on retiree income streams – low deposit rates, slashed dividends, uncertain yields from investment property.

While the banks stepped in early to offer mortgage holidays for people experiencing COVID related financial stress, the mortgage ‘holiday’ will soon be over. What happens then?

Figure two: Delinquency risk

Source: Mortgage Nation – The Great Australian Debt, Illion, February 2020

For those retirees unable to service their debt, there is the very real risk of default. This, in turn, can result in the bank repossessing their home or a forced sale in a challenging property market. Neither are outcomes anyone wants to contemplate.

How can a Household Loan improve the situation?

If you have a mortgage, you may be able to use your home equity – what we call your Household CapitalTM – to repay your mortgage. While you are replacing one type of mortgage with another, a Household Loan has three key benefits for retirees over a traditional bank mortgage:

  • Improved retirement funding – as you don’t have to make repayments, the money you were using to service your loan can instead be used to fund your retirement
  • Interest payment flexibility – you can choose to make regular interest repayments, however, there is no obligation to do so
  • Guaranteed occupancy – whether you choose to make repayments or not, you have guaranteed occupancy of your home until you choose to leave it.

Case study: an unplanned retirement

Michael is 66 years old and lives in North Sydney with his younger partner and two children who are at a private school. His house represents the majority of his wealth, recently valued at $7.6M.

Circumstances have forced Michael to bring forward plans to retire. He had planned to continue to work for several more years to pay down his mortgage, get the kids through school and then realise the value of his property by downsizing.

Michael had been self-employed for a good part of his career and does not have much in the way of super savings. Household Capital was able to refinance a large outstanding home loan ($800K) and provide an income for the next five years. Drawing on a small portion of his Household Capital™, Michael was able to improve his cashflow by no longer making home loan repayments and by establishing a regular income stream from his home equity.

If regular repayments made to an existing mortgage (or other debt) are eating into your  retirement funding – or worse, keeping you in the workforce, unable to retire, click here to see how a Household Loan could transform your retirement.

Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available upon request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434, Australian Credit Licence 391876.

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