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How big a deal is later-life debt?

A growing number of women are relying on their super to pay off the mortgage, writes Nigel Bowen.

Rising house prices means more of us dangerously rely on super to pay off our mortgages.

This is a bigger issue for women than men, according to the 2017 Household and Labour Dynamics in Australia (HILDA) survey. Between 2011 and 2015 only 9.9 per cent of male retirees and 13.1 per cent of female retirees used their super to pay off debt including home loans, car loans and business debt.

For men, the mean amount used to pay off debts was $235,978, accounting for 58 per cent of their super balance. For women, it was $120,543, wiping out 70 per cent of their super.  

Why is this an issue? Because governments assume Australians will be retiring with a paid-off home to live in at minimal cost. As well as money in their super account to supplement (or replace) the modest aged pension.

Women are already on the back foot when it comes to super with men having almost double the superannuation of women. The mean balance of super at December 2015 was $454,221 for men and $230,907 for women, according to the HILDA survey.

Report author Professor Roger Wilkins says this reflects the fact that many more women than men leave the workforce just at a time when their earnings are usually growing the most strongly, which is when they leave to have children.

“Women are also more likely to return to work part-time after having children,” he says. “Because they work fewer hours this lowers their future earnings growth as they’re getting less work experience and fewer promotions. I don’t think that gap will ever close.”

Robert Snell, financial planner at Life Values, adds that this becomes an even bigger issue when there's been separation or divorce and the splitting of assets means they lose the family home and cannot afford to buy a new one. 

"That particular group is really disadvantaged by this switch - they've just so little capital to retire on," he says. 

More people are retiring with a mortgage

Just about everything that could have happened to prevent future generations of Australians retiring debt-free has.

Independent economist Saul Eastlake examined the impact of declining home ownership on retirement in the report, No Place Like Home.

He observed that in recent decades Australians have been spending longer in the education system, exiting it with HECS (Higher Education Contribution Scheme) debts that hamper their ability to save a home deposit, and marrying later in life. The latter is relevant because people often delay purchasing property until they are in a serious relationship.

And, rather than being required to save a 20 per cent deposit before buying, many Australians have been purchasing homes with only 10 per cent or even 5 per cent deposits.

While noting younger Australians may be more interested in travelling and other costly activities than saving for a home deposit, Eslake concludes the chief reason those aged 25 to 54 either don’t own a home, or have a large mortgage if they do, “owes more to economic influences – and in particular the deterioration in housing affordability”.

The lack of affordable housing means younger people are staying home longer. And young women are staying home longer than their male counterparts. The 2017 HILDA survey shows the percentage of women aged 18-21 living at home rose from 67 per cent in 2001 to 86 per cent in 2015. In contrast, the percentage of males aged 18-21 still living at home rose from 75.5 per cent in 2001 to 81 per cent in 2015.

Wilkins attributes this partly to housing costs, along with the rise in the number of young adults choosing to go to university.

“The decline in full-time employment among young adults may also be making it harder for them to move out, although this is itself partly a result of growth in university attendance,” he said. “There is also a broader social trend to doing things later in life – getting married, having children and so on – which may be contributing to the trend.”

The opportunity-cost of debt

Home owners aged 18 to 39 are likely to be particularly susceptible to rising debt in an environment of rising house prices, since most are relatively new entrants to the housing market. The HILDA survey showed that between 2002 and 2014 the average mortgage debt of homeowners in the 18 to 39 age range increased 99 per cent in real terms from $169,000 to $337,000.

To illustrate the impact of rising house prices, Snell gives the example of an average-earning couple, both 25, who bought a house in Sydney a decade ago at what was then the average price of $521,000.

“If they put their minds to it, they could have the mortgage paid off by now,” Snell says.

“In contrast, imagine they waited and, at age 35, bought a house now at the average price of $1.15 million. Even if they put their minds to it, there’s just no way that mortgage is going to be paid off for at least 20 years. I’ve run the numbers and by buying at 25 rather than 35, that couple would be $2.3 million ahead by retirement age.”

In contrast, relying on your super to get rid of your mortgage leaves the pension.

“Which is $33,000 for couples and $22,000 for individuals," says Snell. "You can survive on that income but I don’t think many people would see it as enough to enjoy the comfortable retirement they had hoped for.”

Paying your mortgage off faster

Encouragingly, whether you are a single woman or part of a couple, with a bit of forward planning and sacrifice it is possible to retire debt-free, leaving your super for its intended purpose.

“That minority of people who think 10, 20 or 25 years ahead and take appropriate action to secure their financial future are the ones most likely to have the money to enjoy life once their careers end,” Snell says.

Snell’s first piece of advice is to forget about taking out a reverse mortgage.

“They can work well if you’re 85,” he says. “But at 65 you’re not going to be able to access more than around 20 per cent of the equity in your home through a reverse mortgage.”

While a reverse mortgage won’t save you, what Snell refers to as the ‘Game of Homes’ might.

“Put bluntly, many people have resigned themselves to the fact they will only be able to either get into the housing market, or make a big dent in their existing mortgage, when their parents pass on,” he says.

Those who can’t rely on an inheritance may want to consider downsizing, especially if their children have flown the nest.

“There are tens of thousands of dollars of costs involved in selling the family home and moving to cheaper one,” says Snell. “Nonetheless, if you’ve got $300,000 owing on the mortgage and you move to a house or apartment that’s over $300,000 cheaper, then that’s your debt problem solved.”

Alternatively, as younger Australians are endlessly exhorted to, middle-aged mortgagors can cut back on expenses – overseas holidays, new cars, smashed avocado on toast – and throw every spare dollar into shrinking the mortgage.

This strategy can be turbo-charged by accessing super early and using it to clear your mortgage before you stop working.

“People can opt for a ‘transition-to-retirement’ pension,” Snell explains. “Once you reach what’s known as ‘preservation age’, which is between 55 to 60 depending on when you were born, you can take out up to 10 per cent of your super balance each year. If you had, say, $300,000 in super you could take out $20,000 to $30,000 during your final years in the workforce and put that towards paying down your mortgage.”

A solid investment

There are good reasons Australians down the ages have prioritised paying off their house before contemplating other investments.

“You can put money into voluntary super contributions or shares but a bedrock piece of financial advice is to prioritise eliminating non-tax-deductible debt,” Snell says.

“The return on other investments will vary. But if you’re paying 5 per cent interest rate on your mortgage you’re effectively getting a 5 per cent return on the money you use to pay it off. Apart from all the financial benefits, there’s a real sense of security that comes with knowing you own that asset outright.”

Steps for a debt-free retirement

1. Don’t over-commit when you take on a mortgage

Be realistic about how much you can afford in repayments so your mortgage is paid off before you retire.

2. Prioritise paying down your mortgage

Speak to a financial planner to work out if there are ways to pay off your mortgage faster.

3. Maximise your super

Work out how much super you need to have a comfortable, independent life.
(These calculators can get you started.)