Do you need a mortgage-free house when you retire?

There’s a lot of talk about needing to have a mortgage-free house in retirement. Many experts recommend this goal. But if you’ve just bought your first home, and have 30 years of home loan repayments ahead, it may seem daunting.

So, what are the benefits of reaching retirement with a paid-off home? And why should it be your goal?

You probably can’t afford a mortgage on a limited income, or no income

When you retire and stop earning, it’s a big help to have a mortgage-free home, plus money saved elsewhere. Some people say you can live on NZ Superannuation payments alone by living frugally in a mortgage-free home in the regions, but not everyone can do this. And NZ Super is unlikely to cover home loan repayments or rent in the years ahead. If you pay off your home, you won’t have to spend money on a mortgage or rent. This will cut your living expenses a lot, but remember, you’ll still need to cover house-related expenses, like rates and insurance.

The earlier you pay off a mortgage, the more you can save

You’ll probably need some savings behind you for your retirement, not just a mortgage-free home and NZ Super. Pay off your mortgage at around 50 years old and you should have about 15 years working to really accelerate your retirement savings, depending on when you retire, and your health. If you’re a millennial in your 30s buying your own home now in the larger cities, it’s going to be hard to pay off your house by 50. But trying to get rid of your home loan as quickly as you can may be a good idea. See a mortgage broker or financial adviser for some options.

It gives you options

If you have a debt-free home, you might be able to give up work when you want. You’ll have the flexibility to downsize your home to free up cash, if you’d like to travel, fund health expenses, or move to the regions. When it’s time to get more support in retirement, you can sell your house to buy a retirement unit or to fund weekly payments in a rest home.

It helps give you security

Renting can be a lifestyle of uncertainty. Owning your own home means you’ll never be at the mercy of a landlord who could sell up and kick you out with a few months’ notice. You won’t need to worry about rent increases. Having a mortgage is even more of a worry if a partner dies and you’re left alone to cover the repayments, or a family member gets very sick and you need to stop work to care for them.

Don’t forget your KiwiSaver account

Don’t wait until you’re mortgage-free before saving for retirement. Keep your KiwiSaver account ticking over in the background. Make sure you’re contributing the minimum 3%, so you’ll qualify for the employer contributions (also 3%) and you can also get $521 free money every year from the government (provided you contribute at least $1,042.86 annually). Over the long term, your money will hopefully grow with returns. KiwiSaver’s a great way to help save for retirement.

So, do you need a mortgage-free house in retirement?

There are no hard-and-fast rules with money. But most experts agree having a mortgage-free house by the time you reach retirement is a great goal. It will reduce your living costs, free up money, probably reduce some financial stress, and give you options.

Everyone’s financial situation is different, so it’s a good idea to see an independent financial adviser in your 40s, 50s and 60s, to help you prepare for retirement while you’re still earning. 

Published 21 October 2019

Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here.This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser. All content is correct at time of publication date.