Older Australians pile on housing debt: at what risk?

February 24, 2014
The Estate of Howard Arkley, Courtesy Kalli Rolfe Contemporary Art
The Estate of Howard Arkley, Courtesy Kalli Rolfe Contemporary Art

Increasing numbers of Australians are hitting retirement with hefty mortgages. Instead of running down debt as they get older, they’ve added to it, using their house as collateral. Such is the case with an old acquaintance of mine I’ll call Susan who lives in a charming cottage in inner city Adelaide. Single, 60 and in poor health, she’s now facing a restructure at work that may leave her jobless. “I wish I’d paid the house off when I had the money,” she told me. “Now I’m terrified of losing it.”

A new study shows that far from paying their house off as they get older, a growing proportion of Australians, even in their 50s and early 60s are treating their house as an ATM. They’re extending the mortgage to pay for private health insurance, holidays, private school fees, and home renovations. They’re buying furniture, cars and computers. They’re even using the borrowed money to help with vets’ fees, as one mature-age borrower with a sick cat told the researchers. “… just at the moment we’ve had an incredibly bad run of bills and we had repairs to the car and then our cat got sick and it was just good to have it [housing equity] there so that we could draw the money from it.” Anyone with an ageing pet knows vet fees are astronomical.

The study for the Australian Housing and Urban Research Institute (AHURI) raises concerns about the financial security of indebted baby boomers and middle-aged Australians as they head into retirement. Similar findings about the growing indebtedness of older Australians were made in a 2012 report for CPA Australia. Compulsory super was introduced in 1992 to take the pressure off age pensions and provide an income stream in retirement for living expenses. But the studies indicate some people are being profligate in their pre-retirement years; others are just broke due to divorce and unemployment. They’re borrowing against their house and later, it seems, using their superannuation to pay off the mortgage. And then they go on the age pension. This behaviour won’t relieve the pressure on the age pension one bit. Yet that’s the rationale for extending billions of dollars a year in tax concessions on superannuation savings.

“Super is not meant to be there for people to draw down on to pay off mortgage debt,” said Rachel Ong, an associate professor in the school of economics and finance at Curtin University. “It’s meant to pay for retirement living.”  Dr Ong is a co-author of the new AHURI report on housing equity withdrawal. It reveals 18 per cent of people over 45 cashed in all or some of their housing equity in 2010 compared to 13 per cent a decade earlier. The growth has been highest among people aged 55 and over who continued to add to their mortgage debt even after the GFC.

In his study for the CPA, researcher Dr Simon Kelly argues that retirees will use much of their accumulated superannuation to repay debt. “It could be expected that baby boomers would be saving madly for their retirement,” he says, “but the national figures in this report suggest they only put money into superannuation when it will save them tax and any extra money put into superannuation is offset by taking on greater debt.” Dr Kelly argues people’s knowledge of having a super nest egg coming to them appears to have made them more comfortable about debt. But the nest egg is usually inadequate to service the debt and fund a comfortable lifestyle.

In some ways it can make sense for cash-strapped people to dip into the wealth locked up in their houses, especially if the value of their houses has soared over the decade. The AHURI study reveals those with the most housing debt are also likely to be in a good position to pay it back – they have good incomes and jobs. A significant minority of older Australians, we must remember, appear to be doing very nicely, thank you. Along with debt, there’s also been a big growth in older people with one or more investment properties, an earlier study by Dr Ong and colleagues shows. This is a cause of angst among the young shut out of the housing market.

But those carrying big debts into retirement play a risky game. Life has a habit of throwing up bouncers that can destroy the best financial plans. In Susan’s case, illness and now the threat of unemployment may put her repayments in jeopardy; for others it may be divorce, death of a partner, recession, or falling house prices. The researchers estimate 620,000 Australians fell out of home ownership between 2001 and 2010 and did not get back in.

Australia’s age pension, low by world standards, is based on the assumption most elderly people will fully own their home; this ensures them a reasonable living standard. But rip away the pillar of home ownership, and the prospects for retirees reliant on the full age pension are bleak. In a situation of growing inequality, some older Australians are well-placed to help their children into housing. But others, whether through profligacy, bad jobs, bad marriages, bad luck or indebtedness will be struggling to hang on to a house themselves.

Will you be debt-free in retirement? Is it sensible to unlock some housing equity? Please Comment

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