Association for Public Policy Analysis & Management

In the United States, the share of all households over age 65 is increasing to the point where one in five household heads will soon be labeled as `elderly.’ At the same time, older households are holding an increasing level of debt. According to Census data, in 2015 3.6 million more households aged 65 and older had a mortgage than in 2000, increasing older American mortgage usage by thirty-nine percent. Meanwhile, households under 40 have 4 million fewer mortgages over the same time period.

A traditional life-cycle savings model predicts that individuals borrow at younger ages, then pay off debt and decumulate assets in retirement. Mortgage debt used to buy a home is an example--households borrow at younger ages to buy a home, pay off the loan and then use that asset to consume housing as they age. Based on this, older households should be less likely to have a mortgage. However, we show that the rate of older households holding mortgages over time is rising relative to other cohorts. The rate of holding a mortgage has increased from roughly 10% of households near age 70 in 1980 to close to 40% by 2015. This begs the question, why are seniors increasingly holding mortgage loans as they age?

Some observers suggest that rising levels of debt for older Americans presents a serious problem. If older homeowners hold mortgages and are burdened with making mortgage payments as they exit the workforce in retirement, they have an added monthly expense, potentially crowding out consumption of other welfare enhancing goods, such as health care, food, and prescription drugs. However, given longer life expectancy and extended labor force participation rates of older workers, and improving health status, households may optimally choose to maintain mortgage debt later in life.

Using four datasets, we explore the phenomenon of debt holding by older households. Older households are more likely to hold a mortgage, and have larger mortgages, than in previous decades. This rise in mortgage borrowing has been steady over time and consistent across income groups and geographic regions. Perhaps unsurprisingly, the largest explanatory factor for increased mortgage borrowing is increased homeownership among older Americans. Yet even conditional on homeownership, mortgage borrowing has risen considerably. Other factors contributing to increased mortgage borrowing include tax subsidies, rent-to-price ratios, and increased housing consumption. Many other observable factors such as changes to income, education, bequest motives, or kids do not appear to be driving increased mortgage borrowing. There are no signs these borrowers are defaulting at higher rates, and these households appear to have more assets as their debt levels rise. Instead it appears in recent years older homeowners have been holding on to their homes, extending the terms of their mortgages to potentially smooth consumption and access more liquid savings, or refinancing to access equity. Whether these patterns are sustained as housing prices continue to increase, income tax laws change, and interest rates increase, will be important to monitor over the next decade.