Mortgage in Retirement: Pay Off or Invest? | Quebec Guide

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Mortgage in Retirement: A Common Financial Dilemma

Entering retirement with a mortgage is increasingly common in Canada. According to Statistics Canada, a growing number of Canadians aged 65 and over still carry a mortgage balance. The fundamental question is whether it is better to pay off the mortgage before retirement or keep the loan and invest available funds. There is no universal answer: the optimal strategy depends on your personal financial situation, risk tolerance, and retirement goals.

The Case for Paying Off the Mortgage

Paying off your mortgage before retirement eliminates a significant fixed expense and provides considerable peace of mind. In Canada, mortgage interest on a primary residence is not tax-deductible, unlike in the United States. The real cost of the mortgage is therefore the interest rate paid, with no tax benefit to offset it. If your mortgage rate is 5% and your investments generate an after-tax return of 3%, repayment is clearly advantageous. Furthermore, being debt-free reduces your retirement income needs and decreases the pressure on your decumulation.

The Case for Investing

If the expected after-tax return on your investments exceeds the mortgage rate, it may be mathematically advantageous to keep the mortgage. This is particularly true if your funds are in a TFSA, where returns are entirely tax-free. For example, if your mortgage rate is 4% and your TFSA portfolio generates an average return of 7%, the net gain is 3% per year. However, this strategy carries market risk: returns are not guaranteed and a prolonged bear market could reverse the equation.

Decumulation Strategy and Taxation

The decumulation strategy involves determining the order and pace of withdrawals from your various income sources to minimize total tax paid throughout retirement. In Quebec, retirement income sources include the Quebec Pension Plan (QPP), Old Age Security (OAS), RRSP/RRIF withdrawals (taxable), TFSA withdrawals (tax-free), employer pensions, and non-registered investment income (dividends, interest, capital gains). The goal is to smooth taxable income from year to year to avoid jumping tax brackets.

Planning Amortization Around Retirement

Assess your current mortgage balance: Déterminé how much remains to be repaid and how many years are needed to reach full amortization at the current payment pace.
Calculate your projected retirement income: Add up all expected income sources: QPP, OAS, employer pensions, RRSP/RRIF withdrawals, TFSA income, and investment income. Your mortgage broker and financial planner can collaborate to establish a complete picture.
Use prepayment privileges: Most Canadian mortgages allow annual lump-sum payments of 10% to 20% of the original loan amount. Maximize these payments during your highest-earning years to accelerate repayment.
Adjust at renewal: At renewal, consider selecting an amortization and term that align the end of the loan with your retirement date. Consider opting for accelerated bi-weekly payments instead of monthly to reduce the amortization by approximately 3 to 4 years on a 25-year loan.
Consult a financial planner: A financial planner or tax specialist can model the tax impact of different repayment vs. investment strategies. The analysis should account for your tax bracket, expected investment returns, GIS and OAS eligibility, and life expectancy.

Qualifying for a Mortgage in Retirement

Canadian lenders impose no age limit for granting a mortgage. However, retirees must still meet the qualification criteria of OSFI Guideline B-20. QPP, OAS, employer pension income, RRIF withdrawals, and recurring investment income are all factored into GDS and TDS ratio calculations. Some Desjardins credit unions and alternative lenders may offer greater flexibility for retiree files. A specialized mortgage broker can help identify the best available options for your profile.

Frequently Asked Questions

Is there a maximum age for having a mortgage in Canada?

No. Canadian lenders do not impose an age limit for granting a mortgage. However, the borrower must qualify under the GDS and TDS ratios of OSFI Guideline B-20 using their retirement income (QPP, OAS, RRIF, employer pensions, etc.). Repayment capacity, not age, is the determining criterion.

Should I withdraw from my RRSP to pay off my mortgage?

It depends on your tax situation. An RRSP withdrawal is taxable and added to your income for the year. If the withdrawal pushes you into a higher tax bracket or reduces your GIS eligibility, the tax cost may exceed the mortgage interest saved. Consult a financial planner for a personalized analysis.

Is a TFSA a better option for paying off the mortgage?

The TFSA has the advantage of generating tax-free withdrawals. If you have funds in a TFSA and your mortgage rate exceeds the return on your TFSA investments, repayment may be advantageous. TFSA withdrawals do not affect GIS or OAS calculations, unlike RRSP/RRIF withdrawals.

How do I align mortgage amortization with retirement?

Use prepayment privileges (typically 10% to 20% of the original amount per year) and accelerated payments to reduce the amortization period. At renewal, you can consider selecting a term and payment frequency that align the end of the loan with your expected retirement date. Your mortgage broker can model different scenarios.

Does the Quebec Pension Plan count as income for mortgage qualification?

Yes. QPP benefits, OAS, employer pensions, and RRIF withdrawals are all considered income by lenders. Some lenders also accept recurring investment income (dividends, interest). All these sources are used to calculate the GDS and TDS qualification ratios.