2 July 2019
Downsizing has become a real option to help the rapidly growing number of Australians who are carrying an unwanted mortgage debt into retirement.
New academic research has shown that the proportion of Australians aged 55 to 64 owing money on mortgages has tripled from 14 per cent in 1990 to 47 per cent in 2015. This is the strongest increase of any age group.
The research finds the increase is most likely caused by three factors:
Households being forced to borrow higher amounts of money, as property prices have surged well ahead of income levels
Households using flexible mortgage products to regularly redraw funds from their mortgage, thereby increasing its timeframe
People taking on bigger mortgages because of a belief they can work longer than previous generations.
Having a mortgage in retirement is not a good idea
HLB Mann Judd Wealth Management Partner Jonathan Philpot, told Downsizing.com.au that it is not a good idea to have a mortgage debt in retirement.
“What my advice would be, is to get rid of debt ASAP, on retirement,” Mr Philpot said.
“You’ve got the risk of future interest rate rises, but also from a cash flow perspective it eats too much of the spare dollars.”
Options to get rid of debt
The real question then is: how do you get rid of the debt?
The first option, according to Mr Philpot, would be to sell any assets outside of super, if they exist.
The second option would be to use super to pay off debt.
The academic research finds that an increasing number of Australians are doing exactly that.
Around 29 per cent of lump sum superannuation withdrawals in 2017 were used to pay down mortgages or purchase new homes or pay for home improvements, up from 25 per cent four years earlier.
Mr Philpot said a third option is to downsize, through releasing equity by moving to a less expensive property.
Research shows more Australians downsize to kill debt
Recent research shows that an increasing number of Australians are taking this third option.
For instance, research by National Seniors has shown there appears to be a gradual trend towards downsizing for financial reasons.
This research found that, in 2014, just eight per cent of women and 12 per cent of men said they downsized to “use the proceeds from the sale of the home”.
By 2017, this figure had increased to 12 per cent of women and 18 per cent of men.
In addition, a report by the Australian Housing and Research Institute in 2014 found that discharging or reducing a mortgage was an important consideration for 14.4 per cent of downsizers.
The report found younger downsizers generally considered mortgage-busting to be a higher priority. This is perhaps because these downsizers are part of the new generation which is increasingly taking on debt during, or close to retirement.
To this end, the report noted that some 28.6 per cent of downsizers aged under 55 and 25 per cent of downsizers aged 55-64 said mortgage reduction was a consideration, well above the overall average of 14.4 per cent of all downsizers.
Pros and cons of downsizing to get rid of debt
However, like all major financial decisions, any move to downsize to reduce debt needs to be carefully considered.
Firstly, the transaction costs of moving house need to factored into the equation. The biggest cost here is stamp duty, although if you live in some parts of Australia you may be able to take advantage of seniors duty discounts.
Secondly, choosing the right property is important.
You need to be able to ensure that you are able to release the amount of equity needed to pay off your mortgage and also support your ongoing income. If you are downsizing into an apartment, this includes examining likely ongoing body corporate fees and levies.
At the same time, releasing too much equity from your home does raise the risk that you could trip the pension assets test and therefore lose some or all access to the age pension.
Downsizing.com.au is a great option to allow you to search for the property which meets your preferred budget. Our search function enables you search for properties based on price and location, along with many other factors.
By Mark Skelsey, News Editor at Downsizing.com.au. Email Mark at firstname.lastname@example.org