Rapid rise in retirees with mortgage debt
The number of Australian homeowners over the age of 65 still carrying mortgage debt has trebled since 2002, raising concerns the nation's retirement savings could be absorbed into the housing boom.
In 2002 only 4 per cent of homeowners aged over 65 carried mortgage debt, figures from the Australian Bureau of Statistics show. By 2015, the latest figure available, that had grown to 12 per cent.
Rachel Ong, professor of economics at Curtin University, said it was a "worrying trend" and set to continue because the percentage of homeowners in their 50s and early 60s with mortgage debt had also increased.
The number of 55-64 year-old homeowners with mortgage debt had more than doubled, from 23 per cent in 2002 to 47 per cent in 2015. The percentage of homeowners aged 45-54 with mortgage debt climbed from 55 per cent to 77 per cent over the same time frame.
Professor Ong warned there were not only more seniors with mortgage debt but they were also carrying more debt relative to their income, and ultimately this could have implications for the federal budget.
"There's also a concern that people who carry mortgage debt into retirement might draw-down on their superannuation once they are able to access their super," Professor Ong said.
"If their super accounts are depleted to pay-off their mortgage debt, it will place pressure on the age pension system."
For those older Australians still paying off their own home, carrying a large mortgage debt leaves them vulnerable to rising interest rates and having less to live on in retirement. However, the official figures also include people who have paid off their own home but hold mortgages over investment properties.
Prior to 2000, the percentage of over-65s with mortgage debt was decreasing, but changes in patterns of how seniors live, including re-partnering later in life and "flexible" mortgages that make it easy to redraw funds, are contributing to the trend. Other factors include living longer and working for longer, if only part-time.
Martin North, the founder of research and consultancy firm Digital Finance Analytics, said the trend was driven mostly by high house prices relative to income, loose lending standards and low interest rates.
"It's a combination of those factors that have allowed people to increase their exposure to debt, but the debt has to be repaid," Mr North said.
He estimates more than 50,000 older households - where the main breadwinner is aged in their mid-50s or older - are in mortgage stress and this has doubled since 2010. He defines mortgage stress as where cash flow does not cover ongoing costs.
Felicity Cooper, a financial adviser and founder of Cooper Wealth Management, said it was best to be debt-free at the point of retirement, if possible.
"That's just because you don’t have those mortgage repayments every fortnight or every month and cash flow becomes a lot easier to manage," Ms Cooper said.
One strategy for older home owners to shed the mortgage is to downsize, but this is hindered by younger people staying at home for longer.
"Often now, the parents are 60 or 65 before the adult children have moved out of the family home," Ms Cooper said.
Downside to downsizing
Another reason that seniors might be reluctant to downsize is that the family home is exempt from the assets test for the age pension.
"You can live in a $5 million home and with little cash in the bank and get the full age pension," Ms Cooper said.
But money freed-up from downsizing could reduce the amount of age pension.
Laura Menschik, a financial planner and director of WLM Financial Services, said another factor behind the trend was the bank of mum and dad.
"More parents are helping their children get onto the property ladder," Ms Menschik said.
That means the parents might have less money to increase the repayments on their own mortgage.
Also, they could borrow to renovate their home in the expectation it would improve the resale value.
Not all debt is "bad"
Not all debt carried into retirement is bad debt. Bruce Linton, 63, still works part-time as a building surveyor and his wife is also semi-retired, working as a midwife.
They paid-off their house in Kenthurst in north-west Sydney many years ago and own several investment properties with some of them paid off and others with mortgages.
The investment properties are "cash-flow positive", meaning the rent coming in more than covers the expenses, maintenance of the properties and the interest on the loans.
The plan is to progressively sell their investment properties to reduce their debt.
“It's important to listen to good financial advice, which I have had over many years," Mr Linton said.
"And the bottom line is never to get greedy and borrow too much, and always keep the borrowings to a reasonable limit.”
With house prices on the slide, is he worried? "No, not at all because the rents are solid and [the properties] are in good areas and I will only sell when the time is right," he said.