After all their working years, you would think most Australians would own their home outright once they have retired. The sad reality is that more Australians are retiring with a big mortgage.
The statistics are baffling to us. Between 1990 and 2015, the percentage of 55-64 year olds who owned their home outright fell from 70 per cent to just 47 per cent, according to the Australian Bureau of Statistics. That leaves more people in their 60s and 70s with mortgage commitments.
There’s no denying having to service a debt in your retirement years is really hard. In your twilight zone, you still have to do the maths behind day-to-day expenses including the non-negotiable mortgage repayment. You are likely to have less money to spend on living essentials such as food, clothing, utilities, travel and other activities which will reduce your quality of life.
At this point, a popular strategy used by many retirees to pay down a mortgage is withdrawing their superannuation money. According to Grattan Research, those who own a home outright spend only around 5 per cent of their retirement income on housing. Those who need to pay off their mortgage or rent spend up to 30 per cent just to keep a roof over their heads.
Why is this the case?
“People are spreading the cost of paying off their home over more of their life, rather than trying to squeeze into paying it all off during their working life,” says Bredan Coates, the economic policy program director at the Grattan Institute.
There are two factors adding pressure to the ability to service a mortgage debt:
- Higher property prices – around 10 times the average wage compared with 3 or 4 times two decades ago
- People save for a larger deposit and enter the property market late. As a result, they have fewer years to pay off the loan.
Generally paying off the mortgage as fast as possible makes better financial sense. Once debt-free, you can turn your attention to building up your super. But due to record low interest rates and many super funds offering a higher rate of return, people find the returns they get in their super fund are potentially higher. Every dollar towards paying off your mortgage is saving less than 3 per cent in interest whereas that same dollar invested in superannuation has a return potential of 7 or 8 per cent.
Saving into super also reduces your overall tax bill. You’ll generally pay just 15% tax (or 30% tax if your income is greater than $250,000) on superannuation contributions made from your pre-tax salary, including employer Super Guarantee and salary sacrifice contributions. Earnings you make on your money within super are taxed at a maximum of 15%.
What’s going to happen next?
There are a few important implications:
- Debt-free home ownership in old age can no longer be regarded as the norm which raises questions about how aging mortgage holders will manage their retirement strategies to cope with having mortgages.
- Life-long renting will become more common which means the government will need to figure out how to supply safe and affordable housing for older Australians.
- Another option is reverse mortgage – dipping into your home equity to use as a retirement income.
Women are disadvantaged on so many fronts
Women currently retire with 30 per cent less superannuation than men. And there are systemic reasons for that like the gender pay gap, inflexible workplace policies and exxy childcare options.
Even early in their careers, women are given lower starting salaries than their male counterparts. Throughout their working lives, men earn 14.2 per cent more than women on average, or $1 for every 85.8 cents, according to the latest Workplace Gender Equality Agency (WGEA) pay gap data.
Women living with disability, First Nations women, women of colour and trans women are among those doing the toughest of all. Disabled women are twice as likely to be unemployed. First Nations women are earning a third lower in their median weekly income.
Let’s be honest: we’re not going to have much choice if house prices continue on this trajectory and if there’s no appropriate policy response to bring it down. We need to make clearing debt a priority during our working years and start squirrelling some money for investments or making contributions to your super funds to safeguard our future.