Retiring with debt

Unpaid mortgages represent a new norm for many seniors, with some retirees even adding new mortgage debt. The trend has many experts worried about whether these borrowers can repay their debts.

Almost one in four Canadians over 50 with assets of at least $100,000 retired with outstanding balances on their primary residences, according to a 2010 poll by Royal Bank of Canada. Most homeowners expect they’ll follow suit. A 2012 BMO Financial survey found 51 per cent of respondents anticipate continuing mortgage payments after they stop working.

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Not only are seniors retiring with debt, but they owe more now than in the past. The average mortgage debt for homeowners aged 65 and older jumped by 8.6 per cent in 2012. As disclosed in a Feb. 13, 2013 TD Economics Report, that uptick is more than three times faster than Canada’s average 2.5 per cent increase for mortgagees from across all age groups.

In addition, seniors are taking on debt besides their mortgages. A November 2011 report by CARP, a non-profit committed to “the new vision of aging for Canada,” showed about four in 10 CARP members owe on more than just mortgages, and the source was most likely a personal line of credit.

Looking for clues
Susan Eng, president for advocacy at CARP, has been monitoring trends that might explain the run-up in seniors’ overall debt. She comments, “Because people now live longer and healthier lives, Canadians are more optimistic about being able to pay back their debts as they grow older compared to previous generations.”

Eng sees a link between the current low-interest rate environment and the rise in older Canadians’ borrowing. That insight is supported by an October 2011 TD Economics report that notes that low returns on interest-bearing assets coupled with sharp stock market losses in recent years have motivated some seniors to diversify into real estate.

But while many Canadians aged 65 and older have watched their average home values double from 2002 to 2011, that doesn’t mean most seniors are happily collecting rental income from real estate investments. Gordon Pape, author of Retiring Wealthy in the 21st Century, said he has found no evidence older Canadians are benefiting from rental property investments.

Eng acknowledges that some CARP members already own or are buying vacation properties but adds, “I think the vast majority of seniors are borrowing to fix, renovate or make their homes age friendly.”

Second mortgages may be a factor driving the acceleration in older Canadians’ overall mortgage debt. Like lines of credit, second mortgages can fund a wide range of expenses. These include medical costs, children’s tuition fees or renovating homes with such senior-friendly features as handrails, or wider doors and lower counters. Some seniors have even paid to build a suite that accommodates a live-in caregiver, says Eng.

Unfettered debt dangers
More-detailed research is needed in order to thoroughly understand why seniors’ debt is increasing and what people are doing with their borrowed money. The risks from mounting mortgage debt are much clearer.

Pape, who has written extensively on those perils in another book titled Retirement’s Harsh New Realities, says it’s a question of when, not if, mortgage interest rates will rise. He adds, “For people living on a fixed income, that can create a financial crisis.”

Eng also discourages costly reverse mortgages, which enable homeowners to access some of the equity built up in their houses. “They might be OK as a loan of last resort for people who are perfectly healthy and have no heirs, but other families need to figure out whether they’re going to outlive their mortgage.”

Mitigating mortgage burdens
Pape advises anyone carrying mortgage debt to pay it down at an accelerated rate. “If your monthly payments are higher than the maximum required, you’ll have a cushion when rates go up,” Pape explains. “In the meantime, you’ll be reducing the principal and therefore the interest charge.”

Rapidly paying down mortgages represents an Achilles’ heel for many seniors. The Canadian Association of Accredited Mortgage Professionals’ December 2012 report states just 23 per cent of homeowners aged 55 and over voluntarily paid more toward their mortgage than required. In contrast, around 34 per cent of mortgage holders aged 18 to 54 made extra payments.

Debt attitudes need to change
Although the reasons behind seniors’ mounting mortgage debt are varied and complex, one root cause may be an overly relaxed and accepting attitude toward borrowing money.

“My theory is that this is a carry-forward from the baby boomer consumer mindset,” says Pape, who points out the boomers invented credit as we know it, including lines of credit and oversized credit card limits.

“They [boomers] used borrowed money to live well, and now they’re carrying those same habits into retirement with potentially dangerous consequences.”