Mortgages
One in six homeowners will still be paying off mortgage in retirement
One in six people think they’ll be over 65 by the time they pay off their mortgage, a new study reveals.
Among those aged 55 with a mortgage, 26 per cent expect to still be paying it off over the age of 70 and 12 per cent don’t think they’ll ever repay it.
Younger people are more optimistic with 80 per cent of 16-34-year olds expecting to pay it off by 65, according to the survey of 2,000 people by Hargreaves Lansdown.
However, this optimism may be misplaced as data from the Financial Conduct Authority (FCA) shows 40 per cent of first-time buyers in 2017 will still be repaying at 65.
Sarah Cole, personal finance analyst at Hargreaves Lansdown, said: “65 is the new 50, but not in a good way. Because while previous generations might be footloose and mortgage free by their 50s, increasingly we’re saddled with debts as we head into retirement.”
Coles said the shift is down to higher property prices and more people in higher education meaning homeowners borrow more and buy later.
She also blames people dipping into equity to support children, dealing with “the horror” of an interest-only shortfall, or starting again after a divorce.
What can you do?
Coles shares here eight top tips…
- Repay more now
If you can remortgage to a lower interest rate, more of your monthly payments go towards actually repaying the loan. It means you can save a fortune in interest, and shave years off your mortgage term too.
- Work out if you can afford repayments in retirement
If you’re expecting a generous pension, and your mortgage is likely to be fairly low (and low-cost), then this may not be an issue at all. If you’re on a lower fixed income than you’re used to, and your mortgage repayments are still sizeable, then it’s another story.
- Continue working until you have paid it off
If you are well enough, have no caring responsibilities, and work is available, working longer until your mortgage is repaid is going to be a sensible option for many people.
- Pay it off from savings and investments
This may offer peace of mind, but it’s not always a good idea. During your retirement you’ll be spending down the savings and investments you’ve built up over a lifetime, so you may not want to wipe them out on day one. This is particularly the case if you then need a lump sum later for something like property repairs, and end up borrowing at a much higher rate.
Even if you have the available cash, it may still not make sense if the interest rate on your mortgage is lower than the interest this lump sum could earn elsewhere.
- Use your pension tax free lump sum to pay it off
This is an option, but it needs to be considered carefully. In a defined contribution pension, you may need the entire pot to generate an income you can live off, so dipping into it could leave you struggling throughout retirement. Alternatively, for a defined benefit pension, the best value is often maximise the income and take no cash. It’s a complicated issue to consider carefully or take advice on.
- Downsize as soon as you retire in order to pay it off
This can solve the problem, but do the maths if you’re planning this approach, because you need to factor in the costs of moving – including everything from estate agents and legal fees to stamp duty and moving costs. You may also find retirement housing is in high demand in the area you want to retire in, so you may not free up as much cash as you had expected. There may also be timing issues if you can’t sell immediately.
- Switch to a retirement interest only mortgage
These are interest only mortgages, where you make lower monthly payments to cover the interest, and then after your death (or you move house or into a care home) the property will be sold to repay the outstanding debt. This is a relatively new product, and is an interesting option, but you need to be sure you can afford the repayments, and talk to your family about your decision.
- Release equity
You can free up a lump sum to repay your mortgage, but make sure you understand the implications, especially if you are doing this relatively early in retirement. The interest on the loan will roll up and need to repaid after you die. Over a ten year period, the amount payable on the loan can double, taking out a much bigger chunk of the equity. If you choose this approach, it’s always worth talking to your family, so everyone knows where they stand.
