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Beware the risks of using pension savings to pay off a mortgage – Phillips

by: John Phillips, group operations director at Just Mortgages and Spicerhaart
  • 15/08/2017
  • 0
Beware the risks of using pension savings to pay off a mortgage – Phillips
One in ten of the UK’s 1.9 million interest-only borrowers do not have a plan in place to pay off the loan when their mortgage deal expires – a scenario the regulator labelled “a ticking time bomb”.

It is also estimated that as many as 320,000 homeowners aged between 51 and 65 are planning to use money from their pensions to pay off their mortgages.

With a third of interest-only mortgages set to mature by 2020 (the equivalent of over £50bn worth of interest-only mortgage capital), dipping into pension pots is a logical step for those who have no other way of paying it back.

In fact, in the wake of a radical overhaul of the rules, the Financial Conduct Authority (FCA) has said that this has become “the new normal”, but also added that changes may be required to ensure savers are getting the best deals.


Think carefully

However, borrowers must think very carefully about the possible implications on their retirement income.

Dipping into a pension pot early may not leave the borrower with enough time to build up the value of the fund again through working, leaving people short of income at a time when they are no longer able to earn.

In other words, problems could arise in the next 10 to 15 years when people run out cash.

It’s also worrying to hear that one in five low income interest-only borrowers do not understand the need to repay capital or appreciate the risks, hence the warning from the financial watchdog.


Right advice

For many people, using some of their pension to pay off outstanding loans is a logical solution that makes financial sense.

However, people must not forget that the purpose of a pension is to provide an income throughout retirement.

Those making large withdrawals to pay off their interest-only mortgages must therefore consider whether they are able to top up their savings afterwards.

If they are unsure, they must get the right advice so they can weigh up their options.

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