If you are thinking of buying a home, the chances are that you will need a mortgage. However, a mortgage and the interest that accompanies it can take decades to pay off. And with the length of mortgage terms increasing to make purchases viable, a growing number of new borrowers will still be paying off their mortgage beyond their 65th birthday. Here’s the lowdown.
How many homeowners will be paying their mortgage in retirement?
According to new research data from UK Finance, more than half of new mortgage borrowing is by people who will not have paid off their loan before their 65th birthday.
The research found that 52% of new homeowner mortgage lending has been for terms that extend beyond the borrower’s 65th birthday. This is the first time this figure has gone beyond 50% since records began.
According to UK Finance, the trend towards later life borrowing is being driven by steadily increasing mortgage terms as well as an ageing UK population.
What are the implications of still paying a mortgage in retirement?
Carrying mortgage debt into later years has a number of implications. For some, it might mean having to work past retirement age in order to make monthly repayments.
Other homeowners may also have to release a portion of their pension in order to pay off their mortgage. This could leave them financially exposed, especially if they do not have any other sources of income or financial assets they can rely on.
How can you clear your mortgage before retirement?
If you don’t want to be saddled with mortgage debt in your golden years, there are steps you can take to clear the debt before retirement.
1. Re-evaluate your current budget
It’s worth re-evaluating your budget and seeing if you can free up some extra cash to overpay your mortgage.
Overpaying can help you shave several years off your mortgage term. It will also save you a lot of money on interest. However, be sure to contact your lender to check overpayment limits so you avoid incurring early repayment charges.
2. Increase your income
Generating additional income and using some of it to pay down your mortgage debt can help you clear it faster. You could take on a side hustle that you enjoy, or even rent out a portion of your home.
3. Maximise your savings
Maximising your savings can help you build a nest egg that you can use to pay off your mortgage.
For example, with savings interest rates currently being very low, there is an opportunity to grow your money faster through the stock market, particularly through a tax-efficient vehicle such as a stocks and shares ISA.
What are your options if you’ll still be making mortgage payments in retirement?
Sadly, not everyone will be able to pay off their mortgage before they retire. If you will still be making mortgage repayments in retirement, you have options.
By selling your house and buying a smaller one, you can free up extra cash to pay off your mortgage. Make sure you run the numbers first to make sure that the amount of cash you’ll release will actually be adequate.
Equity release allows you to unlock the value of your home without having to move. It entails borrowing against the value of your property and receiving a lump sum of money that you can then use to pay off your mortgage.
Before you go down this route, make sure you understand the implications. Your home will be sold when you pass away or move into long-term care. The money will be used to pay off the loan plus the accrued interest. Talk to your beneficiaries as equity release means that you’ll have less to pass on to them when you pass away.
If you don’t want mortgage debt hanging over your head during your golden years, it makes a lot of sense to try it to clear it before your reach retirement age.
That said, taking a long-term mortgage that extends into your retirement may not always be a bad thing. If the repayments are a good value and financially manageable, this type of mortgage can still be a viable option.
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