Should I Carry a Mortgage in Retirement?

If you’re like most retirees or retirees-to-be, being debt free is a prerequisite to your retirement application. Here are four reasons to reconsider this once foregone conclusion.

  1. Mortgage qualification – post financial crisis era legislation has all but done away with mortgage qualification without W-2 or salary income. Reverse mortgages are excluded from this generality, but we’ll discuss those in a different post.
  2. Liquidity access – dovetailed with mortgage qualification is access to liquidity. In this case we are talking about the liquidity tied up in the equity of your home. A sound financial plan never includes “spending the house” but adding this liquidity to your retirement nest egg sure can lend some peace of mind
  3. Net mortgage cost – even with the tax plan passed in 2017, most individuals still expect to claim a deduction for mortgage interest, effectively reducing the net carrying cost of a mortgage. As of the date this article is written, 30 year mortgage rates are in the 4.0-4.5% range. This equates to a net cost of 3.0-4.0% depending on your effective tax rate. This cost of capital is at or near historically low levels.
  4. Return on equity – after decades of falling rates, we may be in for a period of rising interest rates. Those who can lock into a long-term fixed rate may be able to a higher return with fixed income investments in the future. Even a 1% higher return over your net mortgage cost on a mortgage spanning the length of your retirement can return greenbacks to your ledger and not the banks’!

While individuals are not permitted to utilize cash out home financing to deliberately make capital market investment purposes, there are no stipulations requiring you to pay cash for your retirement home.

For your retirement’s sake, consider carrying some debt in retirement and allowing it to work for you. As always, be sure to consult with your tax advisor and financial professional for insight into how this strategy might work for your specific situation.