Affordability challenges mean more people could near retirement with outstanding mortgage debt. It could affect your retirement plans or mean your income once you give up work doesn’t stretch as far as you expect. If you’re approaching retirement with a mortgage, read on to find out what your options may be.
The effect rising house prices and interest rates have on first-time buyers is covered in the news. New figures published in Mortgage Strategy show it could be placing pressure on existing homeowners and their long-term plans too.
1 in 5 homeowners aged 55 or over said they don’t expect to pay off their mortgage before they retire. A further 19% said they were unsure if they would clear their mortgage debt before reaching the milestone.
As mortgage repayments might be one of your largest outgoings, retiring before you’ve cleared the debt could place a strain on your finances.
Fortunately, if you find yourself in this position, there are steps you could take that may improve your finances once you retire, including these four.
1. Make mortgage overpayments now
If you’re in a position to do so, overpaying your mortgage now could make a real difference and mean you’re able to retire mortgage-free.
You can choose to make regular overpayments or pay off a lump sum. One of the benefits of overpayments is that you’re in control. So, if your car needs repairing, you may choose to pause the overpayment to manage your budget.
As the overpayment will reduce the outstanding debt, rather than paying accrued interest, you might be surprised by the impact even a small overpayment could have.
If your current repayment mortgage is £150,000 with a term of 15 years at an interest rate of 4.5%, your monthly repayment would be around £1,147. If you decide to:
- Round up the repayment to £1,200, you’d pay off your mortgage 11 months earlier and save more than £3,700 in interest
- Overpay by £200 each month, you’d clear the debt two years and 11 months sooner and save more than £12,000 in interest
- Make a lump sum overpayment of £10,000, you’d reduce your mortgage term by one year and four months and save almost £9,000 in interest.
Before you make an overpayment, it might be worth checking your mortgage agreement to see if your lender could levy an early repayment charge. Often you can pay up to 10% of the outstanding mortgage balance each year before you face a fee. However, this varies between lenders, so reviewing your agreement could help you avoid an unexpected bill.
2. Shorten your mortgage term
When your current mortgage deal ends, it could provide a good opportunity to assess your mortgage term.
Shortening the mortgage term might mean you’re able to be debt-free when you reach retirement age. As you’ll be paying the debt over a shorter period, your monthly repayments may be higher but you could also save money overall when you consider the interest you pay.
For example, if you borrowed £200,000 through a repayment mortgage with an interest rate of 4.5% with a mortgage term of:
- 20 years, your monthly repayment would be £1,265 and you’d pay £103,572 in interest over the full term
- 15 years, your monthly repayment would be £1,530 and you’d pay £75,327 in interest over the full term.
3. Switch to a retirement interest-only mortgage
If retirement is nearing and you’re not in a position to clear the debt, you may want to consider a retirement interest-only mortgage.
With this option, you’d pay the interest accrued each month, but wouldn’t make any payments towards reducing the debt. As a result, it could be a useful way to reduce your outgoings while remaining in your home.
However, you’ll need to make the interest-only repayments throughout retirement, so you might want to consider what effect it’ll have on your budget. In addition, as you won’t be reducing the outstanding mortgage balance, it could affect the inheritance you leave behind for loved ones.
You should also keep in mind that, if your retirement interest-only mortgage has a variable or tracker interest rate, your repayments could change. You might want to consider how you’d cope financially if interest rates increased.
4. Use equity release to access property wealth
Equity release is a way to access some of the wealth that’s locked away in your property. If you have a mortgage, it could be a way to pay off the outstanding debt to reduce your outgoings in retirement and potentially boost your savings too.
Equity release is a type of loan secured against your home. However, unlike a traditional loan, you don’t have to make repayments. Instead, the debt and accrued interest are paid when you pass away or move into long-term care.
To use equity release, you normally need to be at least 55 years old. The value of the property will affect how much you can release, and, if you have an outstanding mortgage, you’ll normally need to repay it with the money accessed.
As you don’t have to make any repayments when using equity release, the amount you owe when you pass away can be significantly more than you initially borrowed. If leaving your home or an inheritance to your family is important to you, calculating the effect equity release may have could be valuable.
You should also note that equity release might affect your entitlement to means-tested benefits.
Contact us if you have questions about your mortgage
If you’d like to understand how you could pay off your mortgage sooner or manage payments in retirement, please get in touch. We can offer you tailored guidance that may help make a decision that’s right for you and could help you enjoy your retirement more.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
A lifetime mortgage is a loan secured against your home. To understand the features and risks, ask for a personalised illustration.
