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Why are more seniors holding onto mortgage debt?

Study sheds light on factors influencing older homeowners

Fewer older homeowners are paying off their mortgages in retirement, and some are worried the trend may have a lasting impact on the financial health of the Baby Boomer generation.

A working paper by the researchers at the Center for Retirement Research at Boston College seeks to pinpoint why this is happening, and how it will affect the massive wave of older Americans approaching retirement.

According to the paper, the number of homeowners over 60 were three times more likely to have a mortgage in 2015 than they were in 1980.

Citing U.S. Census data, the study also asserts that the number of households 65 and older with a mortgage grew 39% in the last 15 years.

“Older households are more likely to hold a mortgage, and have larger mortgages, than in previous decades,” authors J. Michael Collins, Erik Hembrea and Carly Urban write. “This rise in mortgage borrowing has been steady over time and consistent across income groups and geographic regions.”

The authors note that an increase in homeownership among older Americans has played a part in this trend, as many report a preference toward the security and predictability afforded by owning versus renting.

The authors say obvious considerations, such as income changes, education, bequest motives and kids, do not appear to be driving this trend. Instead, they point to three factors that say may be influencing seniors’ decisions to carry mortgages into retirement.

One: Financial planners tout the benefits of a mortgage in retirement planning.

“Since mortgage interest rates are often a low-cost form of borrowing, households can leverage their portfolios by arbitraging the difference between the costs of borrowing and real rates of return when investing in markets,” the paper states.

But the authors note that such strategies can be risky, and it is unclear if they average senior homeowner would have the ability to effectively borrow to invest.

Two: Tax incentives. Mortgage interest is deductible from income taxes at the federal level and in most states, the report notes.

Three: Homeowners may be borrowing to fund their consumption. Home equity is one the primary sources of wealth for those without pensions, particularly low-income and less affluent families, the study states.

“Home equity may be one of the few ways households with little other savings can smooth spending or respond to financial shocks,” the authors write. “Several studies show households often use home equity as a source of liquidity.”

Importantly, the authors assert that older borrowers don’t appear to be stressed about their mortgage debt.

Despite concerns from Consumer Financial Protection Bureau, which said that the increase in mortgage debt is “threatening the retirement security of millions of older Americans,” the paper said there are no signs that these borrowers are in trouble.

“Increased mortgage usage has coincided with less total debt among seniors relative to younger cohorts and has not resulted in increased delinquency,” the authors write. “This may indicate that the negative aspects of increased mortgage usage are limited.”

The study concludes by saying more research on the topic is warranted.

“It appears in recent years older homeowners have been holding on to their homes, extending the terms of their mortgages to potentially smooth consumption and access more liquid savings, or refinancing to access equity,” the authors write. “Whether these patterns are sustained as housing prices continue to increase, income tax laws change, and interest rates increase, will be important to monitor over the next decade.”




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