Canadians and Home Mortgages - A Surprising Statistic!
Why Read (if you are a Canadian): Because, if accurate, this is a surprising, and arguably foreboding, statistic.
Featured Article: An article reports that a recent Bank of Montreal survey reported that 51% of Canadians plan to retire prior to their home mortgages being paid out in full. The article reports that Phil Soper, chief executive of Royal LePage Real Estate Services, a major Canadian realtor, has said that times have changed - and that he believes Canadians can handle the burden of post-retirement mortgage balances. Mr. Soper is reported as having attributed this willingness to carry post-retirement mortgages to:
- the current generation being more sophisticated in its approach to personal finance than the previous generation;
- people living longer, working longer and making real estate plans longer or further into their lives; and,
- People moving into more expensive, upscale homes after retirement, which is said to be "not necessarily a dangerous trend".
Commentary: In Canada residential mortgage interest incurred by homeowners is not deductible for personal income tax purposes, unlike residential mortgage interest that is deductible by homeowners in the United States. For this and other reasons it follows that these survey results may be seen as highly surprising on a number of counts:
- Canadians, rightly or wrongly, generally have been perceived as being somewhat conservative. Most Canadians very likely will be surprised by this survey result, in circumstances they would have believed most Canadian homeowners over 60 years of age had discharged their home mortgage obligations;
- the reasons given by Mr. Soper are curious, assuming his comments have been properly interpreted by those writing and editing the referenced article. This is because:
- personal finance is not exactly the most complex of things. One has a certain amount of expected income, and a certain amount of non-discretionary expense. The only real trick to personal finance is managing discretionary expenses and not spending beyond one's means. To suggest the current generation of +50 year olds is more financially sophisticated than the last can be argued to imply the current generation broadly speaking has more common sense than did their parents. That is very doubtful, particularly given as a generalization what appears to be the comparative state of their personal finances,
- There is no doubt Canadians, on average, are living longer. That they will work longer as a practical matter may prove to be the case, but this almost certainly will occur at the expense of Canadian youth - and almost certainly will not be a good thing,
- Mr. Soper ought to be assumed to be right, given his position, that people are moving into upscale homes after retirement. Assuming that to be the case, further definition is required. It is one thing for a retired person to sell a high-priced house, and to buy another high-priced house in a different location. It is quite another for a person who does not have a high priced house to sell to buy a high priced house close to retirement age, or after they have retired. The latter seems highly unlikely - at least in any large numbers of transactions, and in circumstances where incremental dollars are spent on the replacement property, and
- For Mr. Soper to suggest that retirees moving into expensive, upscale homes after retirement to be "not necessarily a dangerous thing" may be a reasonable statement for those who are simply trading houses for like dollars for 'location reasons'. However, it is unlikely to be a reasonable statement if it includes near-retirees and retirees who are 'moving up' in their housing purchases;
- If the survey asked whether Canadians might or would consider executing a 'reverse mortgage' at or during their retirement years, that could (depending on individual circumstances) make financial sense. A reverse mortgage is a financial instrument that as a practical matter results in a long-term sale of a person's house while enabling the vendor to retain occupancy over what can be a long period of time; and,
- Importantly, if 51% of Canadians are planning to carry mortgages into retirement in an income tax environment where mortgage interest is not deductible, they can hardly be considered 'financially sophisticated'. This phenomenon may simply come down to Canadians enjoying a current life-style at the expense of their retirement life-style - much like their American 'cousins' who at least enjoy mortgage interest deductibility on their home mortgages every April 15 when they file their personal income tax returns.
In the end, if the reported survey is statistically valid, going forward the attitude toward home mortgages it conveys does not auger well for those Canadians who fall into the 51% who plan to carry house mortgages into their retirement years. Hence, the survey results do not auger well for Canadians generally, since how the majority behaves has to impact the minority to some degree.
of Canadians plan to retire with mortgage: survey
Source: The Financial Post, Garry Marr, May 16, 2012
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