How to pay off your mortgage by retirement


The average age people expect to get shot of their mortgage is 59, but one in six reckon they will still be paying it off in their retirement years, new research reveals.

Among over-55s who still hold a mortgage, one in five reckon they will be over 70 when they repay it, while one in 20 say they will never manage to shed the debt.

However, mortgage holidays during the pandemic haven’t significantly shifted the timing of when people plan to pay off home loans, according to Hargreaves Lansdown which did the research. 

Property debt: One in six mortgage holders reckon they will still be paying it off in their retirement years

‘The fact that 2.9 million people took mortgage holidays during the crisis hasn’t significantly moved the dial,’ says personal finance analyst Sarah Coles.

‘This is likely to be because when payments restarted, mortgage companies tended to increase monthly payments instead of extending the mortgage as a default, and it seems borrowers have accepted these bigger bills rather than paying their mortgage for longer.’

Higher property prices, purchases later in life, longer mortgage terms, divorce and debt consolidation are some of the reasons why paying off a mortgage gets delayed, according to Coles.

‘Given the enormous cost of property, and the uncertainty in life, it’s not a huge surprise it’s taking longer to repay the debt.

‘Even if you snap up a property at the average age of 30, and take out a 25-year mortgage, it only takes the odd life hiccup to push payments into your 60s.

‘If you end up dipping into your property equity, or face divorce, you can push your final repayment date back beyond retirement.’

But Coles adds: ‘This doesn’t have to be the end of the world. If you’ve saved for a generous pension, and your mortgage will be fairly modest by then, it may well be affordable.

‘However, if your pension can’t cover it and you’re relying on being able to work later in life, you open yourself to all sorts of risks.’

>>>What can you do to avoid mortgage debt in retirement? Find out below

Downsizing: One option to get rid of a mortgage is moving to a smaller property as soon as you retire

Downsizing: One option to get rid of a mortgage is moving to a smaller property as soon as you retire

The Hargreaves survey found that 6 per cent of people who are currently retired are still paying monthly mortgage bills, but the vast majority owned their property outright.

Meanwhile, the number of people who didn’t know when they would be able to pay off their mortgage rose from 9 per cent in 2019, to 11 per cent in 2020, to 16 per cent in 2021, according to the series of studies the firm has done over the years.

‘This owes something to the fact that mortgage terms are increasing, so borrowers aren’t counting down the days,’ says Coles.

Sarah Coles: 'Your options for remortgaging are likely to shrink once you¿re aged 50'

Sarah Coles: ‘Your options for remortgaging are likely to shrink once you’re aged 50’

‘Increasing uncertainties in life also mean we don’t always know whether we’ll need to borrow more as we go along. Some of this will have been exacerbated by the pandemic.

‘However, we need to keep on top of when the mortgage is due to be repaid, so we can build our broader financial plans around it.’

Coles says the risks older mortgage holders face include being forced to give up work sooner than planned, having less opportunity to put aside money for old age, retiring on less than anticipated, and finding it harder to remortgage in later years.

‘Your options for remortgaging are likely to shrink once you’re aged 50. Many lenders will only consider mortgages in specific circumstances beyond the age of 60, and not at all beyond the age of 70. 

‘Having fewer options usually means paying more for your mortgage.’

Meanwhile, she points out that if you have a joint mortgage then as you get older there’s more risk something will happen to your partner.

‘They could be forced to give up work, or they could pass away, leaving you funding the mortgage on your own at the worst possible time.’

Hargreaves surveyed 2,000 people from across the UK who have a mortgage. 

‘Some lenders are more understanding of older borrowers than others’ 

Mark Harris: Lenders will need to be convinced that you can continue working into retirement and there will be longevity of income

 Mark Harris: Lenders will need to be convinced that you can continue working into retirement and there will be longevity of income

What does a mortgage broker say? Mark Harris, chief executive of SPF Private Clients, gives his take on home loans in retirement.

With house prices rising faster than wage inflation, there is a general trend to buy your first home later in life. To make it more affordable in the short term, borrowers are taking longer mortgage terms than the traditional 25 years.

Some borrowers have a specific need to raise debt later in life; for example, for inheritance tax, to preserve other investments or pay for private medical care.

Some lenders are more understanding of older borrowers than others. Smaller, regional building societies have always been more flexible, with some having no upper age limit, but high-street lenders are starting to broaden their policies to allow for later repayment.

Each lender sets its own risk appetite and criteria; typically, around 70 to 75 is the maximum age for taking out a mortgage with the term usually ending when the borrower is aged between 75 and 85.

Retirement is an increasingly blurred area, as not everyone stops working at 67. Many continue to work, take consultancy, or remain a sleeping partner in a business.

Lenders will need to be convinced that you can continue working into retirement and there will be longevity of income. Lending assessments are based on current and future income to ensure affordability can be met for the term of the mortgage.

There are some alternatives to traditional mortgages for older borrowers such as retirement interest-only mortgages, which are affordability-based.

There is also equity release – with rates falling and products improving, this is more flexible than in the past.

What if you are heading for retirement and worried about paying off a mortgage?

There are plenty of steps you can take to clear your mortgage before retirement, says Coles.

‘It’s worth revisiting your budget to see if you can free up any more cash to overpay your mortgage. Check first how much you can overpay without being charged a fee.

‘Some products allow unlimited overpayments, while others limit you to a percentage of the mortgage – often 10 per cent a year.

‘Overpaying your mortgage shouldn’t be your top priority though. If you have expensive debts, you should clear those first.

‘If you have no cash savings for emergencies, you should prioritise building three to six months’ worth of essential expenses in an easy access savings account.’ 

Coles also warns that if you’re worried that you’re not paying enough into your pension, you shouldn’t sacrifice contributions in the race to pay off your mortgage, because ideally you should revisit your budget and find enough room to boost contributions to both.

‘If not, then in many cases the pension will take priority,’ she says. ‘If you get to retirement age with a balance outstanding on your mortgage, then you have options.

‘If you get there without enough money to be able to afford to retire, your options are much thinner on the ground. However it depends very much on your circumstances and your personal priorities.’

Coles adds: ‘It can be a good idea to revisit this whenever you get a pay rise. You won’t have allocated that cash anywhere else in the budget, so it’s a golden opportunity to boost your monthly mortgage repayments -assuming you don’t have any more pressing priorities.’

Andrew Tully, technical director at Canada Life, says: ‘Complex family situations and buying property later in life mean more people are heading towards retirement with mortgage debt.

‘With savings rates near rock bottom, overpaying on your mortgage can be an easy way to save thousands of pounds in interest.

‘But it’s not right for everyone as you will lose access to the cash and could face repayment penalties.

‘An alternative is to maximise returns on savings so you build up a pot which can help you repay your mortgage.

‘Pensions give valuable tax reliefs, but the downside is you lose access until age 55. But some employers will match any extra contributions you make, which can give your savings a huge boost.

‘For other savings, cash returns are currently very low, so it is worth shopping around for the best return and considering a stocks and shares Isa for some savings.’

Could an offset mortgage help? 

One potential option for those who find themselves not wanting to commit their savings to overpaying a mortgage, but who do want to chip away at the balance quicker is an offset mortgage.

These mortgages allow people to set their savings or current account balances against their mortgage debt and only pay interest on the balance. 

In return they forgo earning interest on their savings, but with savings rates at low levels they may find this a more efficient way of using pots of cash.

If borrowers then maintain their monthly payments at the same level, less goes on interest due to the offset and more on repaying the debt – helping to get it paid down sooner. 

The advantage of an offset over overpaying, is that should the savings pot be needed it can be drawn on at any time, whereas money overpaid on a mortgage is usually not able to be clawed back. 

One caveat is that rates on offset mortgages can be higher, so homeowners should do their sums before committing. 

> Read more about offset mortgages here

What if you reach retirement with a mortgage? Four options to consider

STEVE WEBB ANSWERS YOUR PENSION QUESTIONS

       

Life decisions

One option is to keep working and postpone retirement until you’ve paid it off, says Coles.

‘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.’

She also suggests downsizing as soon as you retire in order to get rid of a mortgage burden.

‘This can solve the problem, but do the maths if you’re planning this approach, because you may not free up as much as you’re expecting.

‘You also need to be prepared to move out of the family home, which can be easier in theory than in practice.’

Use other savings

Paying your mortgage off using savings and investments can offer peace of mind but it’s not always a good idea, warns Coles.

‘During your retirement you will 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.’

You can also use your pension tax-free lump sum to pay off your mortgage, but again Coles stresses this needs to be considered carefully.

‘You may need the pot to generate an income you can live off, so dipping into it could leave you struggling throughout retirement.’

Mortgage solutions

‘If you can remortgage to a lower interest rate, more of your monthly payments go towards repaying the loan,’ says Coles.

You could also consider switching to a retirement interest only mortgage. 

Coles explains: ‘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.

‘You need to be sure you can afford the repayments, and talk to your family about your decision.’

Tully adds: ‘It may be worth investigating mortgages with flexible features, including offset and current account mortgages.’

Equity release

‘You can free up a lump sum to repay your mortgage, but make sure you understand the cost,’ says Coles.

‘The interest on the loan will roll up and need to be repaid after you die. Over a ten-year period, the amount payable on the loan can double.’

Read more here about equity release. 

Best mortgages

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