The data is in, and it will surprise very few that Australians are world leaders when it comes to debt.
Our household debt is second only to Switzerland, according to a new OECD (Organisation for Economic Cooperation and Development) report, with our soaring property prices to blame, leading to an unprecedented number of retirees facing mortgage stress.
The report compared property price rises in advanced economies over the past 20 years, and household debt, with Australian households the second-most indebted out of the 28 countries analysed.
In the 20 years to 2020, Australian house prices rose 120 per cent in real terms, with only real estate in New Zealand and Canada rising faster, says Business Insider.
Low interest rates, the desirability of Australia’s major cities and their planning and zoning restrictions are major forces in our overheated markets.
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The OECD report revealed it takes six years longer to afford a home in Australia compared with the other nations – some 16.4 years to buy a 100sqm home.
Mortgage debt as a share of the economy was more than 90 per cent in Australia, the second-highest behind Switzerland.
Much is made of the seeming impossibility of young people buying a slice of the property market, but at the other end of the scale, many older homeowners face dark days ahead, with little disposable cash in retirement once the weekly mortgage is paid.
A fully owned home is the linchpin to a comfortable retirement, with Treasury’s2020 Retirement Income Review noting that the home was the most important component of voluntary savings.
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In late 2019, the Australian Housing and Urban Research Institute (AHURI) said mortgage debt held by Australians aged over 55 had increased by almost 600 per cent between 1987 and 2015, and more than half of 55 to 64-year-old homeowners would still be repaying mortgages by 2031.
The average mortgage debt owed on property had risen from $27,206 in 1987 to $185,757 in 2015 (a 582 per cent increase), while disposable incomes rose by only 129 per cent (from $38,346 to $87,908 in 2015).
Following the latest real estate boom, that debt will only increase, leaving generation X cash poor as it moves into retirement.
AHURI research found that carrying a mortgage into retirement leads to higher levels of psychological stress, and the smaller the loan, the better the mental health of mortgagees.
Mental health decreased significantly if mortgage payments were missed, with women affected more.
So, how to avoid mortgage stress for anyone nearing or in retirement? Making extra mortgage repayments using investments, an inheritance or other windfall is ideal.
If you’re over 60 and still working, you may be able to withdraw up to 10 per cent of your super every year to pay down your mortgage. But once you turn 65, there’s no limit on how much super you can withdraw, so using super to pay off your mortgage may be an attractive option. But this could leave you asset rich and income poor, plus you lose any future earnings from your super.
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Or you could sell up and downsize, or buy in a cheaper area, but that can affect your Age Pension entitlement as the proceeds from the sale would be considered as income.
However, those over 60 can make a downsizer contribution into their superannuation of up to $300,000($600,000 for a couple) from the proceeds of selling their home.
A reverse mortgage or home reversion scheme is another option, whereby those over 55 release some of the equity in their home to access money.
Every ‘solution’ has implications that need to be weighed, and a financial adviser should always be consulted.
Will you be retiring with a mortgage? If so, how do you plan to manage your debt? Have your say in the comments section below.
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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your retirement.
