Mortgages and Retirement

I’m often asked if you should have your mortgage paid off when you enter retirement? The short answer is, in most circumstances, yes.

When you retire, you obviously won’t have the income that you previously used to make the monthly payments and unless you have a pension, the only way to do so will be to dip into your savings each month. If you have enough savings to do this, you can afford to pay off your mortgage and should probably do so; if you don’t have a pension income or enough savings to cover the monthly payments in retirement, you may become financially stressed at some point.

When evaluating a home purchase, buyers often use the monthly mortgage payment (along with the associated insurance premium and property tax that is usually bundled into it) as the measure of what is affordable for their financial circumstances. That is a useful guide but you must keep in mind if the term of the mortgage aligns with your remaining working career.

For example, a 35-year old person can reasonably use a 30-year mortgage as a proxy for what’s affordable. Under normal circumstances, she will have paid off the mortgage by her retirement. However, consider a 50-year old taking out a new mortgage or re-financing an existing one. If he wants to retire at age 65, he should probably use a 15-year mortgage term to determine what payment is affordable in his circumstances. He obviously has fewer working years to pay off the mortgage.

Unless you have a significant income source in retirement — e.g., a pension or a future inheritance — that can cover the ongoing mortgage payments, you don’t want the term of your mortgage to extend beyond your expected retirement date.

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