After just publishing a post this morning about how half of B.C. homeowners would rather pay off their debt than save for retirement, we were encouraged that more Canadians were starting to take their debt seriously, so they could live a stress-free retirement. However, stats from a survey done by BMO show that we really shouldn’t be so optimistic.
According to the poll, 51% of homeowners say that they will be taking their Toronto mortgages and Ottawa mortgages with them into retirement – and so will people throughout the rest of the country. And not only are people carrying massive debt into their golden years with them, but they’re also doing it for all the wrong reasons. Low interest rates, buying bigger homes, and a “one-day-soon” approach to debt are all reasons why people are going to be carrying massive amounts of debt with them into their retirement.
Doug Porter, deputy chief economist at Bank of Montreal, points to the low interest rates, saying that when homeowners are only paying 3.5% on a five-year fixed mortgage, the debt doesn’t seem unmanageable; and therefore, it’s not a huge priority to pay off. “The extremely low level of interest rates is acting both as an inducement for people to take on more debt than they would have in the past and on the flipside, not encouraging them to save as in the past.”
Mr. Porter points to the fact that this could lead to people working even after retirement age, and that it could also mean there’s little value left in the home to leave as an inheritance to family members. Mr. Porter also said that due to the long amortizations Canadians saw just a few years ago when the max sat at 40, could also be sending the message that the debt is not that important to pay off, and that they have a long time before they need to.
Phil Soper, chief executive at Royal LePage Real Estate Services doesn’t see the half of Canadians entering retirement with debt as a big problem. “It’s not necessarily a dangerous trend,” he said. “People are more sophisticated in their approach to personal finance today than the previous generation. People are living longer, working longer and making real estate plans longer or further into their lives. Traditionally people paid off their mortgage and people lived in their home until it was time to downsize.”
But Tino Di Vito, head of the BMO Retirement Institute, couldn’t disagree more. “It’s a phenomenal number I think,” she said. “Carrying debt into retirement is a threat to financial security,” saying that homeowners need 70% of their pre-retirement income to maintain the same lifestyle. But, she says, “that assumes other expenses such as mortgages are already taken care of.”
