Planning Retirement With a Mortgage | Term and Amortization Strategy

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Why plan your mortgage around retirement?

Retirement typically brings a significant income decrease. According to the Conference Board of Canada, the average retirement income replacement rate ranges between 50% and 70% of pre-retirement earnings. Maintaining a high mortgage payment with reduced income can create significant financial pressure. This is why it is strategic to plan for the elimination or substantial reduction of the mortgage balance before the planned retirement date. This planning should ideally begin 10 to 15 years before retirement, but it is never too late to act.

Aligning amortization with retirement

Amortization is the total planned period to fully repay the mortgage loan. In Canada, for an insured loan (down payment less than 20%), the maximum amortization is 25 years. For a conventional loan (20% or more down payment), some lenders allow up to 30 years. At each renewal, you have the opportunity to shorten the amortization by choosing a shorter period than the maximum allowed. For example, if you are 50 and plan to retire at 65, you can aim for a 15-year amortization at your next renewal.

Repayment acceleration strategies

Accelerated bi-weekly payments: Instead of 12 monthly payments, you make 26 bi-weekly payments (equivalent to 13 months per year). This strategy alone can reduce a 25-year amortization by about 3 to 4 years. Most Canadian lenders offer this option at no cost.
Annual payment increases: Most Canadian mortgage contracts allow increasing regular payments by 10% to 20% per year without penalty. Align this increase with your salary raises to avoid impacting your standard of living.
Annual lump-sum payments: Use your prepayment privileges to make an annual lump-sum payment (typically 10% to 20% of the original principal). Bonuses, tax refunds, and inheritances are ideal sources for these payments.
Strategic refinancing at renewal: At each renewal, evaluate whether a shorter term with a potentially lower rate allows increasing the portion of principal repaid. A mortgage broker can compare options from all lenders to find the best term-rate combination.

Balancing mortgage and retirement savings

Whether to prioritize mortgage repayment or retirement savings (RRSP, TFSA, RESP) is a fundamental financial decision. Generally, if your mortgage rate is higher than the after-tax return on your investments, prioritizing mortgage repayment makes sense. If your rate is low and you have RRSP room, the RRSP contribution may be advantageous due to the tax deduction, especially if you are in a high tax bracket during your working years and expect to be in a lower bracket in retirement.

Term selection as retirement approaches

The mortgage term is the period during which your rate and conditions are fixed. In Canada, terms typically range from 1 to 10 years. As retirement approaches, term selection depends on your overall strategy. If you plan to repay the balance in full within 2 to 3 years, a short term with a potentially lower rate may be optimal. If you wish to maintain a small balance during retirement, a 5-year fixed term offers budget security. The key is to avoid a renewal during a period when your retirement income could complicate requalification. Your mortgage broker can plan your terms based on your retirement timeline to avoid unpleasant surprises.

Frequently Asked Questions

Should I pay off my mortgage completely before retirement?

It is generally recommended, as retirement often comes with a 30% to 50% income reduction. However, if your mortgage rate is low and you can earn a better after-tax return on investments, maintaining a small mortgage balance may be advantageous. The analysis depends on your mortgage rate, your marginal tax rate in retirement, and your risk tolerance. A mortgage broker can help you evaluate both scenarios.

How do I align my amortization with my retirement date?

Calculate the number of years before your planned retirement. Use prepayment privileges to shorten the amortization: increase your regular payments, make annual lump-sum payments, and switch to accelerated bi-weekly payments. At each renewal, consider selecting an amortization that matches the number of years remaining before retirement rather than taking the maximum allowed.

What mortgage term should I choose when approaching retirement?

If you plan to pay off your mortgage within the next few years, a shorter term (1 to 3 years) may be advantageous if it offers a lower rate. If you want budget predictability, a 5-year fixed term protects against rate increases. Some retirees consider selecting a term that exactly matches the number of years before full planned repayment.

Do accelerated bi-weekly payments really make a difference?

Yes, a significant one. By switching from monthly to accelerated bi-weekly payments, you make the equivalent of 13 months of payments per year instead of 12. On a $300,000 loan at 5% over 25 years, this strategy alone can reduce the amortization by about 3 to 4 years and save tens of thousands of dollars in interest.

Can I refinance in retirement if I still have a balance?

Yes, but qualification will be based on your retirement income (pensions, RRIF, annuities, investments). Lenders apply the same debt service ratios and the OSFI stress test. If your retirement income is insufficient to qualify alone, a co-borrower or guarantor may be needed. Your mortgage broker can assess your eligibility.