Should You Pay Off Your House Before Retirement?

Posted by on Tuesday, September 19th, 2023 at 8:31am.

Should You Pay Off Your Home Before Retiring?Whether you should pay off your house before retiring is a complicated topic; honestly, there are no right and wrong answers to this one. It all depends on how large your mortgage is, how big your monthly or bi-monthly payments are, how much you have in RRSPs and other investments, and how much income you expect to have once you hang up the gloves.

One thing is for certain. You should put everything down on paper and do some calculations, especially if you're over 50. Then, when everything is taken into consideration, talk with experts and consider what your gut is telling you. Here are some points to consider to help you make this very important decision.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

What if You Have A Paid-For Home?

Let's assume the answer to the question is yes, you should pay off your mortgage before you quit work for good. Many people believe that a completely paid-for home is the foundation of financial independence. No large payments to make every month, no wasted money on mortgage interest, and a big giant pool of equity just sitting there, waiting to be used. It's like money in the bank.

However, many people in their exuberance to get their homes paid off fail to put their eggs in other baskets, such as RRSPs and TFSAs. It's a good idea to spread the love around, so think about reducing the principal on the mortgage as low as possible without jeopardizing other lucrative avenues.

Think about this. If you can get at least 6% in other savings instruments and the interest on your mortgage loan is less than 3%, what makes more sense to you? And if you do jump in with both feet to get that balance down to zero, remember to make sure you're approved for a Home Equity Line of Credit while you're still working and while the bank thinks you pose no risk.

Reasons to Pay Off Your Mortgage Early

Paying off your mortgage early has many benefits. With one less major expense to worry about, you can enjoy the peace of mind that comes with not having to worry about making those payments. With no monthly mortgage payments, you can use the money to travel or pursue other hobbies—or take care of any emergencies that pop up.

It also saves you money in the long run. By paying off your mortgage before retirement, you avoid paying the interest that would have been charged over the remaining term of the loan. This allows you to leave more money in your estate to be passed on to your heirs instead of going to your lender.

Is it Bad if You're Heading into Retirement with Debt?

So you think you want to be out of debt before the age of 65, but where do you start? Reality check – anywhere from a quarter to 40% of Canadians retire with debt. Surprised? It's not necessarily a bad thing if that debt is your mortgage because, after all, it's an appreciating asset. We hope. It's credit card debt with 15% or 19% or 29% interest rates that are going to kill you. Before you think about paying off your house, get rid of consumer debt.

Reasons to Not Pay Off Your Mortgage Early

There are several reasons why it may not be as beneficial for some to pay off their mortgage early. These include:

  • If doing so would come at the cost of most of your savings
  • If you have a low interest rate, either by refinancing the loan or from the start, and your extra money would be better off invested
  • If keeping the mortgage helps you with tax deductions
  • As mentioned above, if you have high-interest debts, they should take priority over paying off the mortgage

Ultimately, the decision to pay off your mortgage before you retire is a personal one. It's important to weigh the pros and cons to determine which option is best for your financial situation. While there are benefits to paying off your mortgage early, it may not be the most advantageous choice for everyone.

Using Your Line of Credit

Some experts believe that tapping into a home equity line of credit is better than dipping into RRSPs and elevating yourself into a high tax bracket. You might be better off paying 2.5% or even 4% interest on a line of credit, which is always a bit more interest than what your mortgage is, rather than jumping from 33% to perhaps a 42% marginal tax bracket—not to mention the fact that it will affect the amount of Old Age Security and Pension monies you receive every month.

Again, there are no right or wrong answers to this question. Only you know yourself and the type of retirement you hope to have. The only thing to remember is to plan, plan and plan some more.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

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