The Meiers have been living with their dog Beno in a small single-family home on the outskirts of the city for ten years, and they want to continue living there for as long as possible. The Meiers have a first and second mortgage. They keep hearing stories of older people having to give up their own homes for financial reasons. They do not want this to happen to them. Here are the main questions that couples and other homeowners should be asking themselves in this sort of situation:
Home ownership in old age: what you need to bear in mind with mortgage repayments
If you want to continue enjoying financial security in the comfort of your own home when you’ve retired, you’ll need to make sure you are prepared. There are a number of key points, especially when it comes to repayments, that you need to bear in mind
What financial impact does retiring have on income?
Once they retire, the Meiers’ income will consist of their AHV pension and the money in their pension fund, as well as their savings from the 3rd pillar. Like many other people, their retirement income will not be as high as their working income. But the Meiers aren’t too concerned about that: they can also manage on less money, and besides they live pretty frugally as it is.
What about the affordability of the property?
The Meiers do also realize that the bank will review the affordability calculation. According to this calculation, the costs of the house – which, in addition to maintenance and running costs, also include the mortgage and the repayment – should not amount to more than a third of the income. The banks usually calculate the mortgage interest rates at an imputed 5% and the maintenance costs at around 1% of the property’s market value. And this can become quite a challenge: if the Meiers’ income decreases to the extent that the costs of the house amount to more than a third of their income, the bank may deem the affordability risk to be too great. This may result in the bank asking for an additional reduction in the mortgage, or, in the worst case scenario, potentially not making a new offer to extend the mortgage. The Meiers want to be prepared for this scenario: they’re saving up additional capital to pay back some of the loan.
What mortgages must/should be paid off by when?
As we’ve seen, the Meiers have a second mortgage, which has to be paid off within 15 years or by the time they reach the age of 65 at the latest. The Meiers are on track to repaying this second mortgage. And there is even some money left over in the pot to pay off even more of the mortgage. But is this really such a good idea? One one hand, the Meiers could save on living costs (although this is of hardly any consequence with current interest rates) and reduce their debts. On the other, they would be putting money into the property that could potentially come in handy elsewhere when they’re older.
How to reach a good decision
The couple realize that they need some help to sort this out so they take the only sensible course of action: they consult their bank advisor. This advisor reviews the mortgage repayment with the Meiers based on their own individual financial situation and their personal plans for the future. This allows them to ultimately find the best solutions that will give them enough financial leeway in old age and the assurance they can go on enjoying their home without any problems even after they retire. Seeing as the couple is set to retire in twelve years at the earliest, the bank advisor has advised them to pay the maximum annual amount into their retirement savings account, and to combine this with a funds saving plan with a generous equity component. The advisor will then contact the customers in good time so that the equity component is reduced on an ongoing basis before retirement.
Useful to know
- The higher the mortgage interest rate, the better it is to pay off the first mortgage
- Your own individual situation is crucial to deciding whether to repay your first mortgage
- If you choose to repay a mortgage, it is important to note that you cannot deduct as much debt interest from the income as a result
- If you have a long investment horizon, investment funds are a potentially attractive alternative