By Anne Levy-Ward
We sometimes hear that it is better to pay off your mortgage quickly and save for retirement instead. What if that was easier said than done?
If you’re a baby boomer, you probably bought your first home in your late 20s or early 30s. Then you celebrated paying off your mortgage when you were in your 50s. So you’ve had plenty of time to think about saving for a comfortable retirement.
But these days people usually buy later. They also marry later. And rising house prices are forcing them to save longer for the down payment. If you are over 35 when you buy, expect to drag your mortgage into your 60s. You would still be paying off your loan at the height of your retirement savings years. You could even retire and still have your loan. What had always been considered the worst financial mistake…
Are you saving for retirement or paying your mortgage?
So how do you save if you still have a mortgage? And how to retire if you have one?
How to save for retirement with a mortgage?
If there are a few years left to repay, we can still plan for the future. Here are some ideas:
You are not spending all the money on loan repayment. Paying off a mortgage quickly saves big on long-term interest. But the closer you are to repaying your loan, the less valuable these additional payments are. After a while, these payments could hurt your savings rather than reduce the amount of the bill. So pay what you owe, of course. But also put some of your tax refunds, bonuses and other cash inflows into a registered retirement savings plan (RRSP). If you can reduce your budget a bit to make small savings regularly, that’s even better.
Do not have eyes more significant than your stomach when you buy for the first time. Paula MacMillan is a SunLife Certified Financial Advisor and Planner. “Being a homeowner is a wonderful dream. But you have to be realistic, try to achieve what is within your reach and not aim for the impossible”. Your parents might have three bathrooms, a finished basement, two garages and a big yard. They may live in the perfect neighbourhood. But they probably didn’t start with this house. Paula MacMillan recommends talking to a certified financial planner rather than an advisor at the bank. The bank has every interest in you having a big loan.
Consider renting out part of your home. How much space do you still need when your children have grown up and moved out of the family home? If your house has a finished basement and the regulations allow it, consider converting it into an apartment. The rent will help you pay off your mortgage. And then you can decide whether to continue renting it or not, once you’ve finished paying it back.
Retiring with a Mortgage: Does It Matter?
If you think you still have your mortgage in retirement, see it as a fact and not as a failure. Build mortgage payments into your retirement expenses and budget accordingly. As a reminder: once you ARE retired, you are no longer saving FOR retirement. Whether you still have a mortgage or not, you will therefore have access to the money you used to keep. And you always have the option of selling to get capital out of it.
However, if you still have a loan to pay, you will need protection for yourself and your family. Make sure you know the difference between term life insurance and creditor insurance. Mortgage protection is a good idea for anyone with a mortgage at any stage of life.
Mortgage insurance or life insurance? What there is to know
How do you save for retirement when you don’t own a home?
But what to do with your retirement savings if you’ve been completely shut out of today’s overheated real estate market?
“You don’t have to be a landlord at all costs,” remarks Paula MacMillan.
Even if it is the Canadian dream to be an owner, and even so, many people hope to finance their retirement with the value of their home. There are advantages to staying as a tenant.
After the down payment, a mortgage payment is pretty much like rent these days. But what if you invested the money from that down payment instead? Do the math with an advisor. You can estimate your retirement savings in 25 or 30 years, and the result may surprise you. It wouldn’t even consider other costs (utility bills, property tax and maintenance). Invested
