Research from Aegon has revealed that 14% of people believe that they will still be paying off their mortgage when they turn 70.
The report suggests there are several reasons why people may be forced to continue paying a mortgage into retirement:
- Rising house prices: which mean people need to borrow bigger amounts of money or build up higher deposits, increasing the length of time it takes to buy a house and potentially pushing the repayment term into retirement.
- Pension Freedoms: The reforms allow people to retire early, therefore, although retirement may have been brought forward, the mortgage end date won’t change, and payments will continue after work has ended.
- Average first-time buyer age: The age at which most people get onto the property ladder is rising. This, combined with providers offering longer mortgage terms, means that the end date for some people will be many years into retirement.
Why is it important to get your mortgage paid off before retiring?
For some people, paying off the mortgage before entering retirement is not a priority. If you think you might be one of those people, that’s great! But maybe you know someone who could use the information presented here, so be sure to pass the message on!
However, for other people, monthly mortgage repayments can be the difference between being able to commence a peaceful retirement and being forced to stay in work just to stay on top of the bills. In this case, the benefits speak for themselves.
As an aside; having your mortgage repaid earlier will give you more assurance that you will be able to leave a financial legacy behind, whereas, should you die sooner than expected, your loved ones may be left with less than planned.
Does it have to be this way?
Not necessarily, though it will take careful planning and consideration to make sure that your mortgage is paid off in full by the time you reach retirement.
There are various points along the homebuying journey where the decisions you take will affect your ability to repay your mortgage before retiring. No matter where you are in life; planning to buy, approaching retirement, or somewhere in the middle, it is not too late to change the age at which you will be mortgage free.
If you are still preparing to buy your home
At this stage, there are many options facing you and the path you take to get onto the housing ladder could affect how long you are making mortgage repayments for. The three main factors to consider at this point are:
- Your credit score: Improving and maintaining your credit score will give you access to better mortgage rates, which will mean that you benefit from lower monthly repayments or allow you to take a shorter mortgage term, to ensure it is repaid before retiring.
- Your deposit: The quicker you save the deposit for your home, the sooner you will reach the end of your mortgage term. Alternatively, the larger the deposit, the smaller your mortgage and potentially the shorter the mortgage term could be.
If you are eligible there are numerous options in place to make saving a deposit easier, including Lifetime ISAs; tax-efficient savings accounts which offer a 25% government bonus on top of your deposits.
- The cost of your home: The higher the cost of your home, the higher your repayments will be. However, if you try to find a more comfortably-priced property, you will not only benefit from more manageable mortgage payments, you could even increase the amount you pay each month to shorten the length of time it will take to repay in full.
Existing homeowners
If you are an existing homeowner, the first thing to understand is how the end date of your current mortgage affects your retirement planning. You need to consider:
- Whether your mortgage will be finished before you plan to retire. If yes, could you retire early? If no, will the mortgage repayment stop you from achieving everything you want in retirement?
- How future house moves will affect your retirement plans
- How increases to interest rates could affect your ability to pay the mortgage before retirement
- Where you plan to live in retirement and whether downsizing will cause problems where further borrowing is concerned
The easiest way to answer all these questions, and possibly some that you didn’t know you had, is to engage with a financial planner or adviser and discuss your options in detail. A professional will construct a financial plan which considers your future goals and aspirations, as well as events which could knock them off track.
If you are approaching retirement
As retirement draws near, you will need to start thinking about your finances more seriously. If you don’t have a financial plan in place by this point, please call us to discuss your options going forward. If you do have a strategy in place, look for areas of spare money which could be put toward repaying your mortgage early.
If you are not going to be able to repay your mortgage in full before retiring, your attention should turn to finding ways to ensure that you can continue to make mortgage payments from your retirement income. This may involve working for longer than planned, switching your mortgage type or increasing the income you plan to take from your pension to cover the cost.
Of course, you may wish to consider downsizing; something which tends to work better in theory than practice, but if it is what you want to do a financial planner or adviser will be able to help you to achieve it.
Steven Cameron, Pensions Director at Aegon concludes: “Pensions typically take over when salaries stop at retirement. But even without having to fund housing costs in retirement, many people are not saving enough to maintain their lifestyle after work. If saving more into a pension is not an option, working into later life might be the only choice tenants have to keep a roof over their heads.”
To talk about financial planning and advice to help you pay off your mortgage before retiring, please get in touch with us.
