Key takeaways:
- Almost a third of Canadians will have a mortgage in retirement.
- Having a mortgage in retirement can be both a financial and emotional burden.
- Planning on having a mortgage in retirement can grow your wealth faster.
- You need to ensure you have enough income to support a mortgage in retirement.
- The pros of having a mortgage in retirement can sometimes outweigh the cons.
Not too long ago, paying off a mortgage was a key milestone for many Canadians, and having a mortgage in retirement was to be avoided. As recently as 1999, only 8% of retirees still had a mortgage.
Times have certainly changed, however. Canadian home prices, particularly in major cities, have risen stratospherically since then, especially compared to wage increases. On top of that, the increased cost of living, and the need to support both adult children and aging parents, have made paying off a mortgage far more difficult to achieve than 25 years ago. Now, 29% of Canadians about to retire will carry a mortgage into retirement.
Nowadays, the question “Should you have a mortgage in retirement?” requires a more complex answer. The goal of paying off a mortgage before retiring is clearly impossible for many. But does having a mortgage in retirement suggest financial difficulties, or is it simply a new way to manage your finances? Let’s take a look.
How much should you worry about having a mortgage in retirement?
This would depend on your retirement income and overall net worth (including your savings, your home’s value and other property you might own). For some, a mortgage can be both a financial and emotional burden, making it more difficult to cover basic expenses. If you’re retirement income is fairly low, you may struggle to make mortgage payments and be stressed at the possibility of losing your home if you default.
If you continue to work during retirement (or take semi-retirement, as 45% of Canadians are now choosing), making mortgage payments may not be difficult. Similarly, if your retirement income includes Canada Pension Plan, Old Age Security, a company pension and investments, then you may be able to comfortably cover your mortgage payments with a cushion. In these cases, the risk is much lower.
The benefits of paying off your mortgage before retirement
The clearest advantage of not having a mortgage in retirement is the immediate reduction in your monthly expenses. Eliminating your largest payment will increase your cash flow and reduce the risk of running out of money in retirement.
Paying off your mortgage also offers a guaranteed return. For example, if your mortgage rate is 4%, paying it off is equivalent to earning a risk-free 4% return after taxes, which is a rare certainty in volatile markets.
There’s also a psychological benefit. Many retirees enjoy the peace of mind that comes with owning their home outright, freeing themselves from worries about interest rate hikes or the possibility of defaulting on their mortgage and losing their home.
The drawbacks of paying off your mortgage before retirement
While the idea of not having a mortgage in retirement is appealing, it can sometimes work against you strategically. The biggest downside is the opportunity cost: if you use $400,000 from your investments to pay off your mortgage, that money is no longer growing through dividends, interest or capital gains.
Liquidity can also be a challenge; your home isn’t easily converted to cash. Paying off your mortgage with most of your liquid assets could leave you house rich and cash poor.
If you pay off your mortgage at the expense of building an emergency fund, unexpected expenses could force you to take out a home equity line of credit at a higher interest rate or even sell your home.
Benefits of having a mortgage in retirement
For those with sizable investment portfolios, having a mortgage in retirement can be a smart financial move. Using your income to buy investments rather than speed up your mortgage payments can work well, if your mortgage rate is low and your investments are expected to earn more over time.
Having a mortgage also improves your liquidity. Having hundreds of thousands in a Tax-Free Savings Account (TFSA) or other investments can act as a valuable buffer for health care costs, travel or providing financial support for loved ones. Accessing money tied up in home equity is more difficult and costlier.
In an inflationary environment, a fixed-rate mortgage can even be a hedge; as inflation erodes the value of money, the real cost of your fixed mortgage payments declines, while the value of your home and investments generally rises.
Drawbacks of having a mortgage in retirement
The most significant drawback is its impact on your monthly cash flow and standard of living. Since retirement often means a lower income than when you were working, having to make mortgage payments can reduce the amount you can spend on hobbies, travel or other enjoyable pursuits.
There’s also the risk of rising interest rates. If you have a variable-rate mortgage or need to renew it, an interest rate increase could strain your budget, especially if your investments are underperforming.
Carrying mortgage debt can also restrict your housing options. If you plan to downsize or relocate to a retirement community, having significant debt can reduce the proceeds from selling your home and limit your choices.
Factors to consider before paying off your mortgage before retirement
Before deciding if carrying a mortgage into retirement is a wise move for you, consider these key elements:
How much do you value peace of mind? Financial security isn’t just about numbers; it’s also about sleep quality. If having a mortgage in retirement causes you stress, the potential financial gains of carrying debt may not be worth it. For many, the emotional relief of being mortgage-free outweighs investment returns.
Can your investments outperform your mortgage costs? If your mortgage rate is 3% and your investments yield 4%, it’s hardly worthwhile. But if your portfolio historically returns 7% to 8%, having a mortgage could be advantageous.
What does your retirement income look like? Look at your guaranteed income (Canada Pension Plan, Old Age Security and work pension) and your variable income (RRIF withdrawals, dividends and interest). If your guaranteed income easily covers your mortgage and expenses, carrying debt is less risky. If you depend mainly on volatile investments for income, a mortgage adds risk you might want to avoid.
How to manage having a mortgage in retirement
If you decide on having a mortgage in retirement, proactive management is essential, so it doesn’t become a burden. Here are some tips for affording a mortgage in retirement:
A fixed-rate mortgage can provide more certainty in retirement, allowing you to budget comfortably, knowing your housing costs won’t change.
Consider making lump-sum principal payments when you have extra funds, such as from a market windfall. Most Canadian mortgages allow 10% to 20% annual prepayments, reducing interest without raising monthly payments. Read about other strategies for paying off your mortgage faster.
Extend your mortgage’s amortization period (the length of time it will take to fully pay off your mortgage) to lower monthly payments and improve cash flow.
Use your TFSA funds for mortgage payments when needed, since withdrawals are tax-free and don’t affect OAS eligibility.
Having a mortgage in retirement FAQs
Is it common to have a mortgage in retirement in Canada?
Yes. Nearly one-third of Canadians carry mortgage debt into retirement, due to rising home prices and longer mortgage terms.
Will having a mortgage affect my Old Age Security (OAS) payments?
The mortgage itself won’t, but if you have to make large RRSP withdrawals to cover payments, that increase in income could trigger OAS clawbacks.
Should I use life insurance to pay off my mortgage?
Some retirees use cash value from permanent life insurance to pay off their mortgage. Others rely on term life insurance to ensure the mortgage is covered, protecting their family.
Can I get a mortgage after retiring?
It’s possible, but harder since lenders assess income from pensions, RRIFs and investments instead of employment.
Is a reverse mortgage better than a traditional mortgage in retirement?
Reverse mortgages don’t require monthly payments but typically have higher interest rates and reduce equity left for your heirs.
Will having a mortgage in retirement affect my credit score?
Making on-time payments can maintain or even improve your credit score by showing responsible debt management.
Should I prioritize paying off my mortgage or boosting retirement savings?
Focus first on employer pension matches; beyond that, compare your mortgage interest rate to your expected investment returns to decide.
Is having a mortgage in retirement right for you?
This depends on your tax situation, investments, likely retirement income and how much you want to leave in your will. What’s clear is that the modern reality of housing and finances demands a more thoughtful approach than simply rushing to pay off your mortgage.
This is where professional advice becomes invaluable. An IG Advisor can assess your full financial picture — including debt, taxes, investments, estate planning and cash flow — and model scenarios such as paying off your mortgage now versus investing more money. They can help determine the best option to support your successful retirement.
Whether you choose to retire mortgage-free or use your mortgage strategically, the crucial step is to make an informed decision tailored to your unique circumstances. Talk to your IG Advisor about whether having a mortgage in retirement is a good option for you. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor.
Mortgages are offered by Investors Group Trust Co. Ltd., a federally regulated trust company, and brokered by nesto Inc. Licences: Mortgage Brokerage Ontario #13044, Saskatchewan #316917, New Brunswick #180045101, Nova Scotia #202507230; Mortgage Brokerage Firm Quebec #605058; British Columbia, Alberta, Manitoba, Newfoundland/Labrador, PEI, Yukon, Nunavut, Northwest Territories.
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