One way to manage a mortgage in retirement
‘We’ve got a mortgage, it’s small, but we don’t know how to pay it out.’ That’s what a recently-retired client couple told me, and asked, ‘What can we do?’
The couple was in their 70s and the male had recently been made redundant from a job he’d held for more than 20 years. There was no warning, no golden handshake, just a quick note to see the boss after lunch—and that was it.
He’d been the breadwinner, and their plan was that he would work until his early 80s. That meant that by the time he retired, their home would be paid out in full.
Things don’t always go to plan
As we know, things don’t always go to plan. The forced retirement meant they were left with some harsh choices:
- Surviving on a pension rather than a full wage.
- Dealing with the small mortgage on their home, but unable to refinance because neither was employed. That ‘small’ mortgage was using up almost half their fortnightly income.
Their home—where they’d lived for 40 years and raised their family—was suddenly a burden they were struggling to afford. What should they do?
Finding a solution
One option they considered was to sell and downsize. However, they would be forced to move from their area, which they weren’t keen to do. There would also be stamp duty on the new purchase and agents’ fees resulting in more than $50,000 of ‘dead money.’
They could take on a boarder, but that wasn’t practical because they lived in a modest three-bedroom home with most of the value tied up in the land.
After talking with them and their adult children, it became obvious that neither alternative would be efficient or viable. However, there was another option.
Because their children are working full time, the bank was more than happy to lend the funds in the home to them—provided they took on partial ownership of the property.
As a result, they now have their repayments based on a 30-year loan term (more than manageable on their parents’ fortnightly pension).
That leaves them self-sufficient for the coming years or at least until they need to move into assisted living.
There are tax, stamp duty and lending restrictions on this approach, so it’s important to seek independent financial advice before doing this.
However, for those struggling to hold onto their home and who don’t wish to move, this could be a viable alternative.