Repaying your mortgage by the time you reach retirement is often an impossible task, especially given rising living costs and property prices in recent years.
One in six adults expect to be still paying off their mortgage past the age of 65, according to research by Hargreaves Lansdown. With a growing number of retired borrowers, lenders are increasingly pushing back the maximum age that you can be at the end of a mortgage term. Meanwhile, mortgage repayments have jumped as the Bank of England has hiked interest rates to 4.25%, making it tougher to make ends meet.
You’ll still need to make your repayments if you’ve a mortgage in retirement, but if your income is likely to fall substantially when you stop work, as most people’s does, there are also products available that can reduce your repayments in retirement, or enable you to wipe out your mortgage entirely.
Here, we explain what happens to your mortgage when you retire, possible options to repay your mortgage, and where to seek advice.
Can I retire if I still have a mortgage?
You can still retire if you have a mortgage, but it can be a particular struggle to meet mortgage repayments from pension income in retirement, so mortgages are usually arranged so that they end by the time your reach State retirement age You may also want to have paid off your mortgage by retirement so that you can focus on other pursuits, hobbies and spending time with family.
If you have a reliable income stream in retirement, either from savings, your pension, or buy-to-let property, for example, then it may be possible to arrange for your mortgage to continue after you’ve retired. Your lender will need to see evidence that you’ll be able to afford your repayments. Find out more in our article How can older mortgage borrowers prove their income?
It may be worth speaking to a professional financial advisor about your pensions so that you can get a clear idea of how much income you’re likely to have in retirement.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
It may be that you have to continue working until your mortgage is repaid. However, you could reduce your hours or work part-time to supplement the income you’re receiving from your pension to help meet your expenses. Read more in our article How can I phase my retirement? Alternatively, read more below about your options for how to reduce your repayments or repay your mortgage in retirement.
Remortgaging in retirement
Remember that it’s really important to remortgage regularly in retirement if you can, to keep your mortgage costs down. Many people who still have a mortgage in retirement remain on their lender’s Standard Variable Rate (SVR) because they don’t believe that remortgaging is an option for them because of their age, or because their income has reduced. However, mortgage costs have rocketed in the past year and it’s important to ensure you’re not paying more than necessary. According to financial website Moneyfacts.co.uk, the average standard variable rate (SVR) is currently 7.12%, compared to 4.61% a year ago.
Teddy Cenaj, mortgages expert at Rest Less Mortgages, said: “A growing number of lenders are pushing back the age at which you can be at the end of the mortgage term. It’s vital not to let the fact that you’re retired put you off remortgaging, as you can make significant savings. Many lenders will let you take out a mortgage provided it’s repaid by the time you reach age 75, but you can get mortgages with longer terms, too.”
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.
You will still have to satisfy lender requirements, though, including proof that you have enough income to cover monthly repayments. You can use your anticipated retirement income such as your private/workplace company pension forecast, State Pension forecast, annuity statement and any other income to do so. There are some mortgages specifically designed for borrowers in their 50s and 60s, such as retirement interest-only mortgages. Find out more in our guides Mortgages for the over 50s: What you need to know and Mortgages for over 60s: what you need to know.
Should I move to a retirement interest-only (RIO) mortgage?
A RIO mortgage enables homeowners to carry on making mortgage payments indefinitely, with the loan usually only paid back when you die or move out of your home and the property is sold. Standard interest-only mortgages, by comparison, run to a specific date, at which point you must repay the capital you owe. Read more in our article How retirement interest-ony mortgages work.
The specific terms for RIO mortgages vary widely depending on the mortgage lender. Some will allow you to repay part of the capital alongside the interest, enabling you to leave a greater proportion of your property’s value to family and loved ones when you die.
Some providers offer these mortgages to the over 50s, while others may require you to be older. There may also be other requirements. For example, the property may need to be worth a minimum amount, or you may find there is a minimum loan size. Whether a RIO mortgage is right for you will depend on your individual circumstances – a broker can help you to decide on the right type of mortgage for you in retirement.
What are your options if you want to repay your mortgage at retirement?
Mortgage rates have shot up in the past year, so you may be looking for a way to reduce repayments or wipe out your mortgage in retirement. Around six in 10 deals coming up for renewal in 2023 are currently at rates below 2%, according to the Office for National Statistics (ONS), so could face a payment shock when they come to remortgage.
There are a variety of ways that you might choose to repay your mortgage. Options include using existing savings, drawing money from your pension to pay off your mortgage in retirement, or using equity release, and all of these have benefits and disadvantages, which we explore below.
If you are looking at ways to pay off your mortgage early, it’s really important to check the terms of your deal to see whether you’ll have to pay any early repayment charges (ERCs) first. If you’re tied into a fixed, tracker or other rate, you may have to pay an ERC for redeeming your mortgage early. These can sometimes amount to hundreds or thousands of pounds, so you might decide to wait until your current deal finishes before you pay your mortgage off in full.
Using your pension to repay your mortgage
When you reach age 55 (rising to 57 in 2028) you can access your defined contribution pension, and take up to 25% of this as a tax-free cash lump sum.
You could use this to repay some or all of your mortgage if you wish. This will reduce the amount you’ll receive from your pension pot in future, but it can help to reduce your mortgage costs if you use it to pay down your mortgage balance. Remember too that inheritance tax usually doesn’t apply when you pass on your pension savings when you die, so it’s really important to consider the implications of using pension savings to repay debts. Read more in our articles Should I use my pension to boost my income? and Should I take a tax-free lump sum from my pension?
Using savings to repay your mortgage
It may be worth considering using your savings or other assets to pay down your mortgage before you dip into your pension, as using that will reduce your future retirement income.
Remember, however, that it’s vital to have a cash buffer available at all times in case your income falls or you need to cover any unexpected expenses. If you do use savings to make a mortgage overpayment it can be very difficult to get access to that money again – so it’s important to ensure that you are left with enough easily accessible savings should you need them.
Experts usually recommend having between three and six months worth of income in an easy access account. Find out more about building up your savings in our guide How to build an emergency cash buffer.
Downsizing to pay off your mortgage
If your income is likely to fall when you retire, moving into a smaller property should leave you with a smaller (or no) mortgage that may be more manageable to pay off.. Besides, you may want to downsize your home for a number of reasons, such as lower utility bills or not needing so much space if your children have flown the next. Make sure you consider all the costs involved, though, including any early repayment charges on your mortgage, as these could amount to more than you expect. Read more in our article Five questions to ask yourself if you’re considering downsizing your home.
Using equity release to repay your mortgage
Property prices have soared over recent decades, leaving many homeowners with a substantial amount of equity in their property. Equity release won’t be right for everyone, but it works by freeing up some of the equity tied up in your home, without you having to sell it. This money can be used to clear your existing mortgage, and any surplus funds can be spent on anything you want, with many people choosing to help their family financially or to make home improvements. Read more in our article Equity release – what is it and how does it work?
Along with mortgage rates, equity release rates have been rising in the past year. The lowest equity release lifetime mortgage rate is now 5.70%, compared to 4.44% in October 2022, according to financial data analyst Defaqto. This increase means that a homeowner taking out a £50,000 equity release loan could expect to pay £10,411 more in interest over 10 years.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
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