What to do if you still have a mortgage when you retire

In the next few decades, many people will be paying back their home loans well into retirement. David Prosser explains their options.

Almost one in ten people who have reached retirement age are still repaying their mortgage, according to the Great British Retirement Survey. That figure is likely to rise. People are only getting onto the housing ladder in their 30s or 40s and lenders are increasingly offering very long-term deals – Kensington Mortgages has just launched a 40-year home loan.

Mortgage borrowers need to plan their retirement carefully. Interactive Investor says that a 30-year old earning £27,500, a little above the average, is on track for a pension worth around £190,000 if they pay 8% of salary into a workplace scheme until the age of 68. But if they are repaying a mortgage until age 75, once in retirement they would need an annual income (on average) of around £19,000 from that pot to cover living costs and monthly repayments. Their savings would be exhausted by the time they were 75, leaving them dependent on state pensions. 

Mortgage borrowers in this position do have some options. For example, it may be possible to continue working until your mortgage is repaid. Even if you’re only doing part-time work, the income will supplement what you’re taking from your pension. 

Another possibility is using your tax-free cash lump sum to reduce the size of your mortgage, or even pay it off altogether. When cashing in a private pension, savers are usually entitled to take up to 25% of the fund in cash, with no tax to pay. While this will reduce the annual income you can earn from the fund, it could provide a useful slug of capital to cut your mortgage debt.

Equity-release products could also help. These plans, aimed at homeowners over the age of 55, enable you to unlock the value tied up in your house. You get a lump-sum payment, which doesn’t have to be repaid until you die or sell your property because you’re moving into a care home. The lump sum can be used to pay off your conventional mortgage Still, none of these mitigation strategies come without downsides. You may not be able or willing to continue working into your retirement years. Using your lump sum to repay a mortgage means the money is gone, and you will have to settle for a lower pension income.

As for equity-release plans, these can prove costly in the long run. While you don’t make repayments in your lifetime, you are charged interest on the money you unlock from your home, with charges mounting until the debt is settled. There may be little left from the sale of your property for your heirs.

You may have no choice but to take on a mortgage scheduled to run well into your retirement years, but make contingency plans and try to act on them. For instance, overpaying your mortgage, as your circumstances allow, will enable you to repay it more quickly. Increasing your retirement savings, if possible, makes sense. It may also be worth talking to an independent financial adviser about the best option for your specific circumstances.

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