Half a million pensioners still lumbered with a mortgage in retirement

Pensioners have already seen their retirement income squeezed thanks to inflation – and recent research suggests mortgage costs could be adding a significant burden for around half a million pensioners.

The cost of a comfortable retirement has skyrocketed in recent years. Figures from the Pension and Lifetime Savings Association (PLSA) suggest the average two-person household now needs an annual income of £59,000 to enjoy the finer things in their golden years.  

Even the cost of a basic retirement has soared to £22,400 for the average couple, up from £19,900 in 2022/2023. This doesn’t include the costs associated with running a car. Likewise, none of the figures include housing costs, such as mortgage repayments or rent. 

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This paints a worrying picture, particularly when coupled with recent research from financial services company SunLife. 

The provider's survey of 2,000 over-50s revealed that one in five were still paying off their mortgage – despite the fact that a further 13% of this group were no longer working. This suggests that one in 14 retirees, the equivalent of half a million people in the UK, may still be paying off their mortgage. 

It comes as data from UK banking trade body UK Finance shows there were 32,990 new home loans advanced to older borrowers above age 55 in the second quarter of 2024, up 8.34% annually.

The value of this lending was £5bn, which was up 17.5% compared with last year.

Today’s high interest rate environment will only make the burden of mortgage repayments more challenging for retirees. The average two-year fixed-rate mortgage now costs 5.58%, according to Moneyfacts, while the average five-year mortgage costs 5.22%. 

How much will paying a mortgage in retirement cost you?

SunLife’s research suggests that the average retired mortgage holder still owes £33,627. Over a remaining five-year term at a rate of 5.25% (the base rate at the time SunLife's research was conducted, which has since fallen to 5%), this would result in monthly repayments of £638, the company reveals. This sums to £7,656 per year. 

With a basic retirement now costing the average couple £22,400 per year, that means you would be spending just over a third of your annual income on mortgage repayments.

As we have established, this figure from the PLSA does not account for housing costs. So, the reality is that the remaining £14,744 would probably not be enough to cover your other expenses.

“For many years, borrowers of all ages have been taking extended mortgage terms up to age 70 or 75 on the basis of getting the borrowing needed and keeping the repayments affordable,” says Stephen Perkins, managing director at Yellow Brick Mortgages. 

He adds: “When discussing, they often talk about plans to overpay, continue working to that age or reducing the term on future remortgages when their incomes have increased.

“What we are starting to see is [that] those well-intentioned plans rarely come to fruition, and this means more and more borrowers [are] still struggling to cover a mortgage payment on a reduced retirement income, forcing many to end up selling their home or downsizing.” 

How big a pension pot do I need if my mortgage won’t be paid off by the time I retire?

If you are a two-person household looking to enjoy a moderate retirement, this will cost you £43,100 a year, according to the latest PLSA figures. 

Let’s imagine you also have annual mortgage costs of £7,656 per year, the average figure identified by SunLife. This would take your total annual costs to almost £51,000. 

If both people in the household qualify for the full new state pension, they will receive around £11,500 each per year (£23,000 jointly). But they will still need to find an additional £28,000 from somewhere. 

To buy an annuity which pays out £28,000 per year, an individual person would need a pension pot worth roughly £380,000, according to the experts at Hargreaves Lansdown. 

That would buy a single life annuity, so it wouldn’t continue to pay an income to your partner after death. Furthermore, the figures are for a level annuity rather than one that’s linked to inflation. Inflation-linked annuities typically offer a lower starting income. 

How to pay your mortgage off sooner

Recent data from the Bank of England revealed a surge in ultra-long mortgages. More than one million homeowners have taken these out over the past three years, and will still be paying them off in retirement. 

Mortgages with 30 or 40-year terms are more affordable on a monthly basis, but the reality is that you will end up paying far more over the full life of the loan. 

Overpaying your mortgage when you can, or remortgaging with a shorter term once your fixed period expires, could boost your chances of being mortgage-free by the time you retire. 

If you are approaching retirement age and don’t want to delay your golden years, you could consider downsizing and using the equity this generates to pay off the remainder of your mortgage. 

SunLife also points to equity release as a potential solution – but it’s worth remembering that this is still a loan that accrues interest. 

The main difference between this and a mortgage is that “it doesn’t need to be repaid until you pass away or move into care permanently,” explains SunLife chief executive Mark Screeton. 

This means it can “free up retirement funds for those living on a pension income that’s being eaten into by mortgage payments”.