Keep retirement plans going despite mortgage rate hikes
SOME employees and retirees are concerned about the recent rise in mortgage rates as a number of financial institutions have announced new rates that will see mortgagors paying more for their homes and other properties.
Pensioners who are mortgagors with a fixed income will be impacted especially because they are no longer benefitting from salary increases. Those retirees with streams of income in retirement are in a better position to cope financially with the increase in their monthly mortgage. Ideally, it’s best to pay off mortgages or pay down mortgages prior to retirement. This underscores the importance of investing and contributing to a pension plan at the beginning of an employee’s working life.
In September 2023 the Bank of Jamaica (BOJ) Monetary Policy Committee made the decision to maintain its policy interest rate at seven per cent. This is the interest rate that the central bank offers to deposit-taking institutions. Financial institutions will in turn introduce financial products to their clients, guided by the central bank’s policy rate. The purpose of the policy interest rate is to influence consumer prices, stem inflation, stabilise the foreign currency market, and restrain credit expansion by making borrowing more expensive and encouraging consumers to save or invest more. The BOJ’s goal is to maintain an inflation target range of four to six per cent.
Recent reports from the real estate industry are that most of the demand for real estate has come from high-end income earners with interest in the luxury market, and that the majority of the property sales were represented by middle and high-income earners. However, financial institutions are benefiting as more residential homes were purchased in 2022 than in 2023. Majority of these home purchasers were described as young professionals.
I met with a young professional last week who is interested in saving to purchase a home in the middle-income category ($20 million). He indicated that it’s an investment property as he is already a homeowner. The situation was different though for a caller who said he is 10 years from retirement. Both he and his wife are struggling to pay the mortgage for the home that they live in. The recent increase in mortgage rates has impacted their ability to keep up with the payments and so they are looking at options to reduce the monthly mortgage payments or pay down on the mortgage in order to be mortgage-free in retirement.
Again, I reiterate the importance for young employees to save and invest early because the future is not predictable. Having a mortgage on a home can become burdensome if proper financial planning is not in place to deal with any major unforeseen expenses in the future. When mortgage rates increase, the mortgagor needs to have wiggle room to navigate any financial challenge that may arise.
Rising interest rates can positively impact retirement planning. A pension plan usually has a mix of assets such as stocks, bonds, real estate, and money market instruments such as certificates of deposits and commercial paper. The fixed-income instruments will benefit from high-interest rates. Stocks are necessary for the long term as they have proven to beat inflation over time.
In purchasing a home, mortgagors should be financially prepared — this means more than just being qualified for a mortgage. A young mortgagor may be given 30 years to repay a mortgage, but along the retirement journey other financial responsibilities can derail mortgage payments and retirement planning. I recommend having an emergency fund of three to six months of living expenses. This should be used to address any unexpected expenses without relying on credit cards, which carry high interest rates and will increase debt load.
Please note that your credit card should be used as a convenience, not an emergency fund. The funds on a credit card are a debt, not an asset. The funds in an emergency account are an asset. An emergency fund should be in place prior to making a deposit on a house. Eliminate or reduce indebtedness — such as credit card debt and high-interest loans — prior to purchasing a home.
Usually, a five or 10 per cent deposit is required when purchasing a house. I recommend that potential mortgagors save at least 20 per cent instead. This will ensure that the mortgagor has some degree of liquidity after the home purchase and does not become financially stressed. Ideally, your mortgage payments should be about 25 per cent of your disposable income. This will allow the mortgagor to continue to make pension contributions and meet other financial obligations while comfortably making monthly mortgage payments, and allow you to plan for your retirement.
The writer is unknown, but this quote on retirement,”It’s the only time in your life where time no longer equals money” says a lot.
Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at: gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com