Grey debt and the ‘bank of mum and dad’

Most people aspire to one day enter retirement with their mortgage cleared, adequate superannuation savings and no debts left to pay off. However, the combination of high house prices, low interest rates and low inflation are making it more challenging to retire debt free with none or little of your super savings earmarked to pay anything apart from a retirement income.

In a Senate economics committee hearing in October, treasury secretary John Fraser described the high cost of housing as a “worry”, emphasising that homebuyers were becoming more comfortable about taking on more debt.  “As an old person, I talk with people my age,” he added. “And the bank of mum and dad is becoming more and more prevalent. It has impacts on superannuation, and why people are saving in their older years to fund their children’s housing needs.”

By the way, Fraser turned 65 not so long ago – so the question of whether he is “old” is debatable.

And in a recent speech to an investment conference, the new Reserve Bank governor Philip Lowe highlighted Australia’s extremely-low inflation. (The annual headline inflation rate was 1.3 per cent to September.) It seems hard to believe that inflation reached 18 per cent in the mid-1970s.

“Indeed, I am the first Governor of the RBA to have taken office where the concern of the day is more that inflation might turn out to be a bit too low rather than a bit too high,” Lowe commented.  Such low inflation together with low wages growth means, among other things, that homebuyers cannot rely on inflation to effectively help repay their mortgages. (When wage growth is strong, the proportion of income needed to meet repayments can significantly fall with successive wage rises.)

In short, more homebuyers are likely to find their mortgages remain unpaid for much longer periods – perhaps into their retirement.

Furthermore, low interest rates can make homebuyers more comfortable about taking on higher debt to compete against other would-be buyers.  Another temptation triggered largely by low interest rates and high housing prices is to take a home-equity loan to subsidise pre-retirement lifestyles. Again, a risk is that a borrower may not repay the debt by retirement.  All of this can be something of a vicious circle for those saving for a debt-free retirement. And the impact on young people wanting to get their foot into the costly housing market is another story.

Of course, there can be a powerful and understandable case for parents to assist adult children to buy their first home – if the parents can afford it without damaging their own prospects for a satisfactory standard of living in retirement. Much depends on personal circumstances include advice received.  It’s hardly surprising that mortgage debt is lowest among older households. Quite simply, they have had much longer to pay it off than younger households.

However, a research paper, Buy now, spend later – Household debt in Australia – published last December by the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra – reports that home mortgages made up almost 30 per cent of debt for households headed by a person aged 65 or older – up from 19.6 per cent in 2004.  And home mortgage debt accounted for 46 per cent of debt for households headed by a person aged 50 to 64.

There’s plenty to think about before taking a bigger mortgage later in the countdown to retirement and/or agreeing to open the “bank of mum and dad” to adult children wanting a leg-up into the costly housing market.

Source: Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard. Reproduced with permission of Vanguard Investments Australia Ltd
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