Retiring With a Mortgage or Other Debt in Canada

How much debt is OK in retirement?

Do I need to get out of debt before I retire?

What percentage of Canadians retire with debt?  Am I the new normal?

These questions appear to be getting more and more common judging by the frequency with which they end up in my inbox.

Given how rising interest rates are now affecting retirement decisions, the choice to carry a mortgage or other debt into retirement is obviously top of mind for a lot of folks.

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*Data Source: BMO Retirement Survey

So How Common Is It to Carry Debt Into Retirement in Canada?

It’s more common than one might think!

But that doesn’t mean it’s much fun…

I’m sure most folks don’t picture their ideal retirement as one spent fretting over making ends meet – especially in the face of rising interest rates. That said, here’s a round up of a few Canada-wide debt in retirement numbers.

• 52% of retired Canadians have either car payment or mortgage debt
• 20% of retired Canadians still have a mortgage loan 
• 7% of retired Canadians had a loan for home renovations
• Retired Canadians have on average $11,204 in non-mortgage debt (this statistic might be misleading given all the retired Canadians that have $0 in debt).
• 40% of Canadians said that they plan to delay their retirement because of too much debt.
• Mortgage balances for Canadians aged 56-66 were up about 180% from 2012 to 2018 (and given housing costs and interest rate movements since then, I would think it’s safe to say we’d be well over 200% by now).
• Debt as a fraction of assets has more than doubled over the last twenty years for folks in the 56-66 cohort.

Now these statistics don’t really tell you the whole story. For example, if a person has positive equity in their house and they plan to sell their house, and then rent for the rest of their life (many good reasons to do this), then retiring with a mortgage doesn’t necessarily signify financial frailty.

On the other hand, if a person has rented their whole life, but has not saved any money, then they might be in a somewhat perilous predicament – yet wouldn’t show up in these retiring with a mortgage numbers. Then, of course, there are those that want to use a reverse mortgage, which under very specific circumstances might be an ok solution – but which could also skew these statistics.

All things being equal, entering retirement with a paid off house has some major advantages, but it’s not essential – as long as you have a well thought out plan to address the debt and payments – and are aware of the tradeoffs.

Advantages of Paying Off Your Mortgage and Being Debt Free In Retirement

Here’s a quick look at what I see as the main arguments for aggressively paying down your mortgage and striving to retire debt-free.

1) Raw simplicity.  Financial planning without a mortgage or other debt in retirement is just easier. It allows you to create a budget with more certainty and flexibility built in. There is a lot to be said for simplicity – especially as we set out to enjoy “the Golden Years”.

2) Fewer nightmares about rising interest rates.  Obviously given the current trend of unprecedented interest rates, this one doesn’t need a lot of explanation. The more debt you have, the greater the risk you have that your standard of living could be reduced by interest rates gobbling up more and more of your budget. 

If you have to renew your mortgage in the next year or so, you’re looking at a monthly payment that is likely hundreds of dollars higher. Entering retirement with no debt just makes it easier for most people to sleep at night.

3) The investment math does add up. It doesn’t make sense to both own fixed income investments and to be paying higher interest rates on debt. I’ll break this one down in more detail below.

4) Home equity is a nice buffer. Having a paid off house as you enter retirement is simply a great shock absorber for the rest of your retirement planning. You don’t have to worry about increased rental rates.  You give yourself the option to downsize one day and get 100% of your equity back. 

Is It Ever OK to Retire with a Mortgage or Other Debt?

The bottom line is that it’s OK to retire with a mortgage – as long as you have a plan for how to address that loan.

If you know you have some chances to earn a side income in the first two years of retirement, and after that the mortgage will be done with, then you’ll probably be fine.

If you’re in the top 2-3% of financially literate Canadians and your goals involve maximizing your final estate, then maybe you want to try something like the Smith Manoeuvre, which would allow you benefit from a tax-deductible loan in retirement – but which technically isn’t a mortgage.

The potential issue is that retiring with a mortgage just adds one more variable to your already-complicated retirement game plan. Look at the recent increase in interest rates. If you are carrying a mortgage for your first five years of retirement, you might have just seen several hundred dollars per month evaporate from your monthly budget. 

There’s also the issue of not knowing how long you’ll be able to work at the pay level you think you will be when you hit 60 or 65. If you budget for a fairly high spend on your mortgage each month, it doesn’t leave you with much flexibility if you find yourself unable to work for various reasons.  

Paying Off Debt vs. Investing as Retirement Approaches

One of the age-old questions in Canadian personal finance is: Should I invest this extra cash I have, or use it to pay down the mortgage?

The mathematically correct answer is: Just tell me what mortgage rate you’ll get for the lifetime of the loan, as well as the after-tax return you’ll get from the assets that you invest in – and I’ll tell you what to do today.

Obviously it’s impossible to tell in advance what mortgage rates will be and what rates of return each asset will have. That said, when it comes to your final decade before retirement, here’s a few investment vs. debt pay off principles to keep in mind.

• Paying off debt is a guaranteed tax-free return! If you’re going to have a tax rate of 30% on your investment income, then you have to earn 30% more just to break even from an overall money-in-pocket perspective.
• Paying off debt is much more simple than optimizing your investments. Sure, we like to think we make things a lot easier by pointing you towards Canada’s Best ETFs, and how to withdraw investments from your RRSP and TFSA – but there is no denying that many Canadians still find the idea of opening up an online brokerage account to be somewhat intimidating. Paying down debt is usually a much more digestible check off to make on the to-do list.
• Paying off debt doesn’t include any fees. Even if you use our tips to cut your investing fees to the bone, investing still comes with costs. Paying down debt usually has none. (Make sure and consult your mortgage contract in regards to maximum amounts you can pay early.)
• If you are like most retiring Canadians and want a somewhat cautious “balanced portfolio” that includes some “safe” fixed income products such as GICs and bonds (see our Best GIC Rates in Canada article for the latest deals) then it really doesn’t make sense to also be paying a mortgage.  The reason is that for banks to make money they basically have to take in your savings (using savings accounts and GICs) and then lend them out to other people – at a higher rate – on mortgages, auto loans, etc. You might be able to get a short-term personal situation where you locked in a low-interest mortgage years ago, but for the most part, it makes no logical sense to be paying a mortgage at interest rate + profit margin, while getting paid the basic interest rate on your GIC.
• There is an argument to be made for “splitting the difference” and using some extra cash to invest in equities (stocks and ETFs) within your RRSP, and then using the refund to pay down the mortgage faster. So many Canadians I’ve worked with seem to be inspired by this strategy, and if it encourages you to take action today, then I say go for it.
• If investing in GICs instead of paying down your mortgage as you head into retirement isn’t a great idea, carrying credit card interest rate debt or even rising Home Equity Line of Credit (HELOC) rate debt really make no sense. The bank’s profit margin gap on these products will be even higher than they are on mortgages.
• If you happen to be reading this article more than ten years before you think you’ll retire, you should know that the vast majority of Canadian financial experts recommend wrapping up that mortgage payment closer to 50 than to 65. That gives you a critical final few years at – hopefully – your highest earnings level and lowest mandatory spending (kids, etc) to supercharge your retirement savings.

Are You Saving Enough for Retirement?

Canadians Believe They Need a $1.7 Million Nest Egg to Retire

Is Your Retirement On Track?

Become your own financial planner with the first ever online retirement course created exclusively for Canadians.

Try Now With 100% Money Back Guarantee

*Data Source: BMO Retirement Survey

Should I Sell My House and Downsize to Pay Off the Mortgage Before Retirement?

The topic of what to do with your housing equity will get a post all to itself in the near future.

For now, let it suffice to say that downsizing your house as you approach retirement makes a ton of sense to me – and yet it’s not all that popular!

When I think about the ideal housing situation from a “utility-maximizing” point of view (to borrow some economist speak) to me it makes the most sense to own your biggest home when you have a young family, and then downsize from there. 

Instead, what I often see is many Canadians who are 45-50 purchase their “dream home” right as their kids are hitting their mid-teenage years or moving out of the house. It seems odd to me that we’d lock ourselves into a new mortgage payment until we were 65 or 70 in order to purchase our largest home – when for the majority of that time we’ll have a relatively small number of people living in it.

With so many retiring Canadians having a ton of housing equity as the biggest part of their network, I think selling their house, paying off their mortgage, and buying a substantially cheaper home in a less sought after location or smaller square footage – then using what’s left to up their standard of living – is a potentially great move.

Of course it all depends on what your goals are in retirement, and how much you value staying in the house you’ve been living in for much of your life.

As With All Things Personal Finance – Your Mortgage is Personal

There are tradeoffs that come with paying off your mortgage as quickly as possible and making sure that you don’t carry debt into retirement.  What you choose to do should depend on which side of those tradeoffs you prefer.

Do you prefer to keep life simple, get a guaranteed after-tax investment return with essentially no work, and keep your housing equity as the ultimately “break in case of emergency” asset?

Or is your lifestyle substantially raised by moving into that dream home at 50, or perhaps taking more risk in your investment portfolio?

My guess is that the vast majority of Canadians would find themselves more comfortable with the first option, but the second option can work assuming the right planning is done and everyone is comfortable with the risks involved.