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One in six homeowners will still be paying off mortgage in retirement

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  • 02/09/2019
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One in six people think they will be over 65 by the time they pay off their mortgage, according to a study by Hargreaves Lansdown.

 

Among those aged 55 with a mortgage, 26 per cent expect to still be paying it off over the age of 70 and 12 per cent do not think they will ever repay it.

Younger people are more optimistic with 80 per cent of 16 to 34-year olds expecting to pay it off by 65, according to the survey of 2,000 people by Hargreaves Lansdown.

However, this optimism may be misplaced as data from the Financial Conduct Authority (FCA) shows 40 per cent of first-time buyers in 2017 will still be repaying at 65.

Sarah Cole, personal finance analyst at Hargreaves Lansdown, said: “Sixty-five is the new 50, but not in a good way. Because while previous generations might be footloose and mortgage free by their 50s, increasingly we’re saddled with debts as we head into retirement.”

Coles said the shift was down to higher property prices and more people in higher education meaning homeowners borrowed more and bought later.

She also blamed people dipping into equity to support children, dealing with “the horror” of an interest-only shortfall, or starting again after a divorce.

 

Hargreaves Lansdown suggested eight ways borrowers could help solve the situation:

  1. Repay more now

Remortgage to a lower interest rate, means more of the monthly payments go towards repaying the loan, potentially save a significant amount in interest, and shaving years off the mortgage term.

  1. Are repayments in retirement affordable

For borrowers expecting a generous pension with a fairly low, and low-cost, mortgage then this may not be an issue at all. However, for those on a lower fixed income than they are used to, and with still sizeable mortgage repayments, then it could be another story.

  1. Continue working until you have paid it off

Those who are well enough, have no caring responsibilities and with work available, may wish to continue working longer until their mortgage is repaid.

  1. Pay it off from savings and investments

This may offer peace of mind, but it’s not always a good idea. During retirement borrowers will be spending down the savings and investments built up over a lifetime, so may not want to wipe them out on day one. This is particularly the case if a lump sum is needed later for something like property repairs, resulting in borrowing at a much higher rate.

Even if with the available cash, it may still not make sense if the interest rate on the mortgage is lower than the interest this lump sum could earn elsewhere.

  1. Use the pension tax free lump sum to pay it off

This is an option, but it needs to be considered carefully. In a defined contribution pension, homeowners may need the entire pot to generate an income to live off, so dipping into it could mean struggling throughout retirement. Alternatively, for a defined benefit pension, the best value is often to maximise the income and take no cash. It’s a complicated issue to consider carefully or take advice on.

  1. Downsize at retirement to pay it off

This can solve the problem, but do the maths if planning this approach because the costs, including everything from estate agents and legal fees to stamp duty and moving costs, will need to be included. Retirement housing may also be in high demand in the area looking to retire in, so owners may not free up as much cash as expected. There may also be timing issues if they are unable to sell immediately.

  1. Switch to a retirement interest-only mortgage

These are interest-only mortgages, where borrowers make lower monthly payments to cover the interest, and then after death, you moving house or into a care home, the property will be sold to repay the outstanding debt. Borrowers need to be sure you can afford the repayments, and should talk to family about the decision.

  1. Release equity

Homeowners can free up a lump sum to repay their mortgage, but must make sure they understand the implications, especially if doing this relatively early in retirement. The interest on the loan can roll up and would need to be repaid after death. Over a ten-year period, the amount payable on the loan can double, taking out a much bigger chunk of the equity. If choosing this approach, it is always worth talking to family, so everyone knows where they stand.

 

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