Avoid paying off your mortgage in old age
As thousands face paying off their mortgage even after giving up work, guest blogger Andrea Rozario of the Equity Release Council looks at what steps you can take to avoid it.
Over the next 30 years over 400,000 people expect to retire owing more than £50,000 on their mortgage according to our latest research.
However, this is only really the tip of the iceberg as many more will find that due to unforeseen circumstances, such as redundancy, windfalls and inheritances failing to materialise or underperforming endowments, they are facing this issue too.
Is there an easy solution? Unfortunately not, but there are a number of steps that people can take to either avoid the situation all together or rectify it before it becomes a real worry.
Think about your mortgage term
'Prevention is better than cure’ as the old saying goes, and in this situation it's absolutely true. Firstly, people need to remember that while remortgaging for the full term (usually 25 years) each time they remortgage will reduce their monthly payments, it will increase the length of the loan.
This might not seem to be an issue when you are thirty or thirty-five but may lead to remorse later on when you find you are still meeting mortgage payments at sixty when you would rather be saving for retirement.
Make overpayments when you can
Another old statement also holds true in this situation – don’t put off for tomorrow what you could do today. While most people are feeling the impact of the current economic situation, at some point many people find that they either get an unexpected windfall, bonus from work or financial gift.
Everyone’s financial priorities are different but making an overpayment on their mortgage does hold long term benefits.
On this note, when people take out a mortgage, it is worth checking to see if they can make overpayments and – if so – in what form. Some lenders allow you to regularly overpay while others set an annual limit. Working within these parameters, people can position themselves to repay their loan before they need to retire.
What if it's too late for that?
Often people put their heads in the sand but by ascertaining this basic information, people can then incorporate repayment of this debt into their retirement plans. Having gathered this information, if people realise that they may need to keep repaying their mortgage into retirement, they do need to consider their options.
In order to do this, I would suggest that people consider getting independent financial advice. While this will need to be paid for either via commission or up front fees, it can be very valuable when deciding how to plan retirement finances. An adviser will talk you through your options and may even suggest that you could be eligible for certain types of Government assistance.
Another option they may discuss involves down-sizing to a smaller property. Aviva suggests that the typical over-55 in the UK has a house worth £236,474, but Land Registry figures reveal that the average house in the UK is worth £162,900. So some people may be in a position to clear their mortgage by selling their home.
However, this move does have costs attached, so the cost vs. reward ratio will need to be weighed up, as will the emotional impact of leaving what is likely to be the family home.
While most people – especially the older generation – prefer not to discuss their personal finances, speaking to family members about the issue can help. Indeed, they may find that their children would be prepared to repay the remaining mortgage in return for a stake in the value of the home or simply to ease their parent’s entry into retirement.
For older people, equity release is also an option. According to Key Retirement Solutions 18% of people use this method to clear their outstanding mortgage. While it is essentially ‘refinancing’, it does mean that they do not need to make monthly repayments and therefore have a higher disposable income.
However a person decides to tackle repaying their mortgage before they retire, it is important they realise there are a variety of options and by facing the problem head-on, you can save yourself a lot of stress.
Andrea Rozario is Director General of The Equity Release Council
Are you likely to face mortgage repayments even after retiring? How do you plan to pay them? Or are you taking steps to avoid having to pay for your property with your pension? Let us know your thoughts in the comment box below.
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