Should you pay off your house before retirement?

Posted by on Thursday, March 24th, 2016 at 12:40pm.

It’s a complicated topic and in all honesty, 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, 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, go with your gut.  In the meantime, here are some interesting tidbits from a variety of industry experts to help you make this very important decision.

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 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 the 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.

Some will argue that with today’s low interest rates, there is really no rush to pay off your house.  Well, low interest rates aren’t worth a hill of beans if you run out of cash to make your monthly payments.  When your income becomes fixed, then your monthly payments should become fixed and today’s low interest rates could be tomorrow’s 1982 reboot of 17% interest.

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 – in a 2013 pool conducted by CIBC, 59% of retired folks had some sort of debt.  Surprised?  It’s not 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.

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 everything 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

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