Could rising home loan costs affect your retirement?

The number of Australians who own their home outright has declined dramatically over the last two decades, to the point where home owners with a mortgage now outnumber those who have paid theirs off. These findings were revealed by the Australian Institute of Superannuation Trustees (AIST) in their recent report on the impact declining home ownership is having on retirement.

Declining affordability in the Australian property market has led to higher mortgages that are taking longer to pay off, and subsequently eating into people’s retirement funds.

We take a look at what this situation means for your retirement, and why securing the right home loan from the outset is so important.How could the decline in housing affordability and ownership affect your retirement?

Why has home ownership declined?

According to the AIST report, there have been several contributing factors to the decline in home ownership since the 1990s. The increase in mortgage values relative to incomes has meant people have been required to take out larger mortgages.

Increases in the maximum loan-to-valuation ratio (LVR) of lenders, the fact that it’s now possible to bundle other debts with your mortgage, as well as the decline in inflation and in nominal interest rates, have also led to a general decrease in housing affordability. This has, in turn, impacted levels of home ownership.

What impact will this have on my retirement?

All this could mean that many Australians may need to use some of their retirement funds to pay off their homes.

“Compared to 15 years ago, when almost three out of five home owners owned their home outright, home owners with a mortgage are now in the majority,” said economist Saul Eslake, who is investigating the potential impact of rising housing costs in retirement, to Your Investment Property magazine on 24 March.

Mr Eslake believes the retirement balances of Australians are under threat as a result of rent and mortgage repayments that are draining income later in life. His concern is that more retirees will need to use a significant portion of their superannuation to pay off their mortgages – money they need to live comfortably during retirement.

“There is a clear link between deteriorating housing affordability and the adequacy of Australia’s current retirement income stream,” Mr Eslake said.

Is there anything I can do?

Concerns about retirement are understandable, and housing affordability is a pertinent issue at the moment. However, if you save sensibly and consider alternative options for securing and paying off your home loan (such as joining forces with family or friends), there is no reason why you cannot have your cake and eat it too. Securing a home loan that won’t weigh you down is also a crucial part of the process; enlisting the help of a mortgage broker who compares lots of different banks and lenders will find you the right deal.