My interest-only mortgage is ending and I can’t claim my pension yet


Retirement pending: Pension, job and mortgage problems are coinciding for a 64-year-old

Steve Webb answers his 300th question from a This is Money reader today – watch out for a series of articles and events to celebrate this landmark all this week.

I am a 64 year old single female and for the past 14 months I have been working from home full time through a temporary jobs agency.

The job is due to end and I do not have another one to go to.

I have noticed a big decline in my health over the past two years and don’t think I will be able to work full time again especially if that meant physically going to a workplace environment.

I am due to receive my state pension in March 2024 and for the past nine years I have been getting a small monthly local government pension of £415 a month.

However, I have been paying the interest only on my mortgage for approximately 10 years due mainly to insecure work.

I owe £48,500 on my mortgage, the term ends in April 2023 and I have zero savings to pay it off.

Are there any good options that I could consider especially as the interest-only amount has gone up by £70 since April this year and is likely to go up even further?

Plus, the likelihood is I will have no job for 18 months until I retire and my only income would be my local government pension until then.

That will go up with inflation next year, but on its own it is not enough to cover all the rising energy and food costs.

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Steve Webb replies: It may be helpful to start by thinking how you are going to pay off your mortgage and then look at your finances between now and pension age and then into retirement.

You are far from being alone in coming towards the end of an interest-only mortgage and not having the money to pay it off.

You probably have two main options when it comes to paying off your outstanding debt.

One option would be to ‘trade down’ to a smaller property. In principle, the sale of your current property (net of moving costs such as stamp duty, estate agent costs and so on) could yield enough to buy somewhere new and pay off your outstanding mortgage.

However, I quite understand that trading down may not be a very attractive option. Many people do not want to move just at the point of retirement, especially if this might involve moving away from their local area in order to find something more affordable of a suitable size.

Another option would be to take advantage of the fact that you presumably have quite substantial equity in your property.

You could therefore consider taking out an ‘equity release’ product which would enable you to pay off the mortgage to your existing lender and to stay in your current home for the rest of your life if you wish.

It is estimated that just over one in three equity release mortgages are taken out with the primary purpose of paying off an existing mortgage, so you would not be the first to go down this route.

For someone of your age and in average health, you might find that the most you could borrow would be around one third of the value of your property, so you would need a decent amount of housing equity in the first place for this option to be viable.

It is possible however that you might be allowed to borrow slightly more if allowance was made for your poorer health.

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You would have to take specialist financial advice and independent legal advice before taking out an equity release product, and rightly so because this is a big decision which affects you as well as any potential beneficiaries.

One thing which an adviser would explain is that if you make no payments at all on this new product then the interest bill would quickly reduce your housing equity.

Although modern equity release products have a ‘no negative equity’ guarantee, you could find that if you have a long retirement then the interest payments on your equity release loan could wipe out much of the value of your property and there would be little to leave to your beneficiaries.

Another option is what is called a ‘retirement interest only’ mortgage (Rio).

In this case you would be paying the interest on the amount of equity release, rather in the way that you currently pay your mortgage, albeit the Rio interest rate would almost certainly be higher than the rate you are currently paying.

However, the lender would need to be confident that you could afford the repayments, and strict lending rules are one reason why Rios have not really taken off so far.

The advantage of this approach is that it would protect the value of your housing equity, but the downside is that you could find your finances would be very tight if you have to fund this cost out of a state pension and a modest local government pension.

In terms of your short-term finances, it will clearly be very difficult (if not impossible) to make ends meet in the coming months if you literally only have your local government pension, especially if your current mortgage is still in force.

One thing you should do as soon as you stop work is claim Universal Credit and get evidence from your doctor that you are unfit for work.

STEVE WEBB ANSWERS YOUR PENSION QUESTIONS

       

But there is no guarantee that the DWP will accept that you are unfit to do *any* work, especially if the sort of work you do can be done from home.

Whilst you should not do anything to jeopardise your health, if it is possible to keep working a bit longer, even part-time, you may find that this is a better option.

If you do claim Universal Credit, whilst the DWP no longer pays mortgage interest as a benefit, there is a scheme where DWP will cover mortgage interest payments on a repayable basis.

This is a bit like taking out a second mortgage, as the DWP would eventually claim back all that they had paid out (plus interest) when your home was eventually sold.

You can read more about the ‘support for mortgage interest’ scheme here.

One further option you could explore with your existing lender might be whether the term of your mortgage could be extended or some flexibility given until you reach state pension age.

This may not be possible, but it might give you some new options or more time to decide what to do, and it would be sensible to at least find out from your lender what flexibility they might be prepared to offer.

Your financial position should ease slightly when you reach pension age. You can get a state pension forecast here but if you have a full National Insurance record the chances are you will be entitled to around £10,000 per year in state pension by the time you reach pension age plus your local government pension.

Taken together, these would normally be enough for a modest standard of living in retirement for a single person, but this could be a stretch if you have not resolved the mortgage issue by then.

As you know, you have a mix of short-term financial issues, including how you make ends meet between retiring and reaching pension age, and bigger issues such as how to deal with your mortgage balance.

The sooner you can speak to an adviser about how best to juggle all of these competing questions, the better. I wish you well in resolving these complex matters.

Ask Steve Webb a pension question

Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.

If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.

Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.

Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.  

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