Carrying a mortgage into retirement can derail travel plans and affect spending, but there are also good reasons for doing so.spawns/iStockPhoto / Getty Images
Retiring with a mortgage is no longer an anomaly.
Three in 10 Canadians (29 per cent) who are planning to retire within the next two years say they will carry a mortgage into retirement, according to a Royal Le Page survey conducted by Leger this past May. That’s more than double the 14 per cent of senior households who entered retirement with a mortgage in 2016.
In turn, many advisors are building relationships with mortgage brokers, similar to those they have with accountants or lawyers, to enhance their financial planning capabilities. Advisors are recognizing that a well-structured financial plan has to factor in a mortgage, whether it’s part of a broader tax strategy, requires aggressive repayment, means delaying retirement, or leads to a reverse mortgage or downsizing.
“We look for a mortgage broker who typically works independently, and they become someone whose brain we can pick,” says Jeff McCartney, financial planner at Objective Financial Partners Inc. in Toronto.
He says working with a mortgage broker has helped him explore fixed versus variable rates for his clients and to determine the benefits of downsizing or considering a reverse mortgage.
“They provide me with useful information when I need it – and that’s going to be part of our financial plan,” he says.
Managing mortgages
Retiring debt-free is the most desirable strategy, Mr. McCartney says, as the stress of carrying a mortgage into retirement can derail travel plans, affect spending dramatically, and decrease a client’s enjoyment of life.
He says for those Canadians who don’t have the income, pension or savings to pay off the mortgage, it’s key advisors run the numbers to see if carrying the mortgage is even viable.
If paying off the mortgage ends up being unsustainable, Mr. McCartney discusses downsizing to a smaller home, moving to a less expensive community, or renting.
Other options include pushing back retirement by several years or lowering costs dramatically through a lifestyle adjustment – something he concedes can be challenging for individuals who have become accustomed to a certain way of life.
Justin Prasad, a financial advisor at BlueShore Financial, a division of Beem Credit Union, says that in his North Vancouver community, many seniors are working longer to pay for their homes, some of which are valued at well more than $1-million.
While some downsize to the Sunshine Coast or to Vancouver Island, areas with less expensive housing, some clients are reluctant to leave their communities. He says that in cases in which a senior couple wants to stay in their home, a reverse mortgage can sometimes be an option.
“If they want to entertain that option, then we’ll bring in a partner such as Home Equity Bank, do a collaborative meeting, leaving it to the client to understand the ramifications of doing so,” he says.
Other times, he works with the bank to explore whether a home equity line of credit might offer more flexibility than a traditional mortgage payment.
Tax strategy
While some clients with a mortgage are cash-strapped, not all retirement scenarios with mortgages involve low cash flow, says Ross McShane, an advice-only financial planner in Ottawa. He notes that many of his high-net-worth clients carry mortgages into retirement strategically.
“There may be tax reasons why they’ve carried some debt into retirement, and they’re waiting to be in a lower tax bracket in retirement to find ways to withdraw from their accounts and pay off the debt at that time,” he says.
In other cases, a client may have been able to pay off the debt, but because interest rates were low, they chose to top up their TFSA after an inheritance.
He says advisors should discuss the rationale for the mortgage before developing a financial plan, factoring in the mortgage rate, cash flow, as well as a client’s RRSP and TFSA holdings.
Each situation requires a nuanced, careful approach, he says. “Let’s figure out if it makes sense to accelerate the paydown of [the mortgage] when you consider the cost of borrowing.”
Mr. McShane recently worked with a client with mortgage debt he wanted to eliminate.
“I came up with a plan in which we could remove funds from a corporate investment portfolio when they were in a lower tax bracket to pay off that debt,” he says.