Is Having a Mortgage in Retirement So Bad?

Owning a home free and clear isn’t always the right goal for older people. Should your clients roll the dice with real estate investments?

Is mortgage debt in retirement really such a bad idea? Financial professionals have long touted a mortgage-free retirement as a worthy goal, if only to remove the potential stress that comes from having an unrelenting bill to pay when regular paychecks end. But with interest rates still hovering near historic lows and the mortgage interest deduction providing an extra perk to home owners, bringing a little debt into the golden years may not be as risky as people have been led to believe. If they’re in a position to rethink their retirement strategy, your clients have the potential for significant gains.

Using home equity to leverage further investment in rental property and other real estate assets actually makes a lot of sense for older home owners right now. Low rates mean they won’t be spending down too much of their nest egg toward an extra mortgage payment while benefiting from a steady stream of rental income. But people have to decide whether they can tolerate the responsibilities as well as the psychological ups and downs of owning additional property.

Real estate investments are a good way to generate consistent and fixed retirement income at a time when incomes are struggling, though they do pose risks for seniors. Scammers are increasingly targeting older Americans, and real estate investment schemes are among the ways they are trying to defraud the elderly. To help your client through a good investment deal, you’ll want to take steps to protect them from financial abuse.

Still, your older clients shouldn’t fear investing in real estate. Despite the housing debacle of 2008, the likelihood of losing principal in real estate is relatively low over the long haul, and ultimately, the expected annual return from real estate investments may exceed a low mortgage rate and generate a decent margin for the home owner. Even so, some owners may still be uneasy about mortgage debt in retirement.

In a research study I conducted with my colleagues at Kansas State University, we examined the effect of mortgage debt in retirement on financial satisfaction for 3,124 retired home owners over age 55. Surprisingly, we found that the idea of having mortgage debt in retirement negatively affected those who are generally uncomfortable with debt anyway. There was no relationship between holding a mortgage in retirement and financial satisfaction for households whose homes were not underwater. Instead, a significant relationship was found between retirees’ comfort with their debt levels and financial satisfaction.

So for retirees who are comfortable with their debt levels, they may be psychologically comfortable with mortgage debt. This change in perspective can help practitioners facilitate more relationships with those retired clients who may be more likely to refinance or obtain first mortgages and lines of credit to invest in real estate or any other investment. So when you’re speaking to clients, be sensitive and gauge their beliefs and comfort with their debt rather than simply focus on the objective costs.

Also, depending on your clients’ tolerance level for risk and debt, you may suggest that they consider maintaining a low-interest mortgage into retirement rather than liquidating other investments or using cash to pay it off. I’ve had such a conversation with a retiree who was considering paying off the $300,000 balance on his mortgage with cash he had saved up over decades. The nest egg he spent a lifetime accumulating could have been spent with the flick of a pen. Instead, I suggested he invest his spare cash in a rental property, and he’s now making a 5 percent annual return.

While paying off a mortgage reduces monthly expenses, if your clients have ample cash flow to cover their bills, they may be missing out on the chance to take advantage of low interest rates and putting the equity in their homes to use. The old advice to retire your mortgage may not be warranted. If you can help your clients optimize their retirement strategy, you both may find it rewarding.