Retiring with debt raises difficult problems

And because their more thrifty parents, many of them with memories of the 1930s depression, avoided debt like the plague, they're doing so in an environment that's simply not set up to handle them.

A RaboDirect report last year found one in five baby boomers expects to retire with a mortgage and many are expecting to use their super to pay it off.

But judging by complaints from Herald readers, the problems faced by older borrowers can be different from those experienced by younger people and lenders don't necessarily appreciate that.

One has a problem that makes you shake your head at banks' willingness to throw credit at 18-year-olds who have just entered the workforce.

This retiree has substantial assets (we're talking millions) and has held platinum credit cards for many years without missing a payment.

He draws $100,000 a year to live on from his super, but says whenever he applies for a new credit card or to raise the limit on his present ones (inflation has halved their limit value), he is knocked back because he has no earned income. These knock-backs won't help his credit rating as they are listed on his credit file.

I took his case to the Commonwealth Bank, which says it will accept pension income when assessing an application for credit, though it needs to be sure it is lending responsibly.

So it is hard to say why the problem exists, though you'd think a high-net-worth borrower with a good credit history would romp it in.

The other case is more serious. This involves a 63-year-old who is unable to work. His wife is 61 and has a low-paid job.

They moved to the coast a few years back, bought a house and still owe most of it on a 25-year mortgage.

The couple have been meeting their mortgage repayments from savings, but those savings are running out and the wife's income isn't enough to cover the repayments plus their basic living expenses. Her superannuation is worth a similar amount to the home loan and the intention is to repay the loan from her super. But that's proving a problem.

To access her super, the wife has to give up her job and the income it generates. With money tight, that doesn't appeal.

Her super fund has said that if they miss multiple payments and then get a letter from the bank, it may release enough for 12 months to pay the interest only. That's about as useful as the proverbial chocolate kettle.

The ideal situation, the reader says, would be to access the super now, pay off the house and for his wife to continue to work and build up some more super for a few years.

Instead, she may be forced to quit her job, get her super, pay the house off, then go to Centrelink and say she has changed her mind and wants to work again. As getting a new job at her age is unlikely, she will be eligible for unemployment benefits.

"So we will have saved our house but be on a lower income, which will come from the taxpayers of Australia," the reader writes.

I ran the problem past the executive manager of FirstTech at Colonial First State, Deborah Wixted. She says the hardship provisions (under which super funds can let you access your money before retirement) are "extraordinarily difficult to get across the line" and the bank needs to be threatening foreclosure before the money can be released. So relying on them is a high-risk strategy.

Stopping work then getting a new job, as our reader has pointed out, ticks all the right boxes but there's that problem of finding another job.

Wixted says another option may be to start a transition-to-retirement strategy, in which the wife rolls her super into a pension but keeps working. However, she can withdraw only 10 per cent of the money each year from this pension. While that might help them meet the loan repayments, it would also deplete her super unless she could afford to be contributing extra at the same time.

She says the best option might be to talk to the bank about whether the loan could be changed to interest-only until she can access her super, which would reduce the repayments and hopefully make them more manageable. Any extra cash could be pumped into her super to pay out the loan when she turns 65 and can access her super without worrying about whether or not she is working.

The Commonwealth Bank says most lenders have hardship policies and borrowers should approach them when they first run into problems. Where assets will be available to repay the loan, a solution such as switching to interest-only might be possible.

Wixted says as more people approach retirement with debt, financial planners are also having to deal with the impact on things such as age-pension benefits. For example, when Centrelink assesses your income and assets to determine whether you're eligible for the pension, it uses net value and net income. So if you have a mortgage over an investment property, the value of the property is reduced by the mortgage and the rent by the interest paid on the loan.

However, if you have a mortgage against your family home, you don't get this benefit as your home is not taken into account for the means tests. So Wixted says retirees need to pay off credit cards first (they're unsecured and not taken into account), then the home loan, then any margin loans over shares. While the margin debt reduces the value of your shares for the assets test, Wixted says it doesn't reduce the income.

Perhaps our grandparents had it right, avoiding debt at all costs.

But the reality is that many older Australians are going into retirement still owing money. Both the government and our financial institutions will have to offer more flexibility to cope with them.

Twitter: @sampsonsmh