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Is a mortgage free retirement on your horizon?

By: Steve Huebl & Rob McLister, Canada Mortgage Trends

With debt levels up and savings rates down, more people are lugging a mortgage into retirement. But not everyone.

According to a recent CIBC/Harris-Decima survey, mortgage freedom comes earlier than expected for some. Of those polled who successfully paid off their mortgage, they were able to do so (on average) by age 48.

But there's a bit more to this story, as a separate BMO poll reveals.

According to BMO:

  • Over half (51%) of Canadians expect to carry a mortgage into their retirement years;
  • Of the more than three-quarters of Canadians aged 50 to 59 who own their homes, nearly half currently have mortgage debt;
  • The picture improves moderately in the following decade. For those aged 60 to 69, a full 75% own their homes, but a quarter of them are still carrying a mortgage.

TD also weighs in on the senior citizen debt trend. Last fall, it polled workers nearing retirement and found that four out of 10 people expected to make mortgage payments after they stopped working. 

So, today, the average borrower predicts mortgage payoff by age 55, says CIBC. That's seven years more than it took current free-and-clear homeowners to eradicate their mortgage.

The why...

Why are amortizations being stretched out? Well, there are more than two reasons, but for one thing home prices (and mortgage size) have risen faster than the income used to pay them.

Moreover, when people got a mortgage 20 years ago, personal savings rates were a mindboggling 4.3 times greater than today. Accordingly, people back then were more inclined to make accelerated payments or prepayments.

Strategies

For those homeowners who were able to pay off their mortgages years before retirement, these are some of the strategies they used (again from the CIBC survey):

  • 52% made lump sum payments annually when they were able;
  • 42% increased the amount of their regular mortgage payments;
  • 40% increased the frequency of their regular mortgage payments.

Of course, being able to use these strategies requires sacrifices along the way. 78 per cent of homeowners who have paid off their mortgages said they did one or more of the following:

  • 53% said they skipped large, "unnecessary" purchases;
  • 53% said they relied on a budget to track their spending;
  • 49% reduced extra spending, such as on eating out and entertainment;
  • 38% skipped vacations.

"A key finding in this poll is that Canadians who have successfully paid off their mortgage made some difficult choices about how best to spend their money over the course of their mortgage," said Colette Delaney, Executive Vice President, Mortgage, Lending, Insurance and Deposit Products, CIBC.

Some of the sting from those sacrifices can be minimized with simple tactics like increasing mortgage payments when you get a raise (See: Inflating your mortgage payments), or using tax refunds for a lump-sum prepayment in the spring.

The takeaway...

Retirement arrives much quicker than most of us envision when we're young. By making sacrifices now and capitalizing on today's low rates, homeowners can shave several long years off their mortgage. A little pain now is worth the gain later, because if income drops in your golden years, it makes mortgage payments a much harder pill to swallow.