Repaying your mortgage in retirement: What are your options?

When you reach the end of your working life, having to continue meeting mortgage payments probably wasn’t part of your plan. But it’s a reality that many retirees are facing.

Rising property prices and buying first homes later in life, combined with unexpected life events, such as getting divorced, means millions of homeowners expect to still be paying back their mortgage in retirement. Research found:

  • 21% of mortgage holders worry they’ll still be paying off their mortgage in retirement
  • Over half (58%) don’t know how they’ll keep up with repayments, worryingly half of this group are already aged over 55 and approaching retirement

As the struggles continue for first-time buyers, it’s an issue that’s likely to affect many more in the future. If you’ve not ticked off the milestone of paying off your mortgage before you reach retirement, it can be a burden. But there are still options open to you that can help ensure you’re financially secure in your later years.

Continue with a traditional mortgage

You don’t have to change your current mortgage deal if you don’t want to. If you decide to continue working past traditional retirement age or your retirement income will provide enough to continue meeting repayments, you can continue as you are.

Whether this option is right for you will depend on your priorities and projected income streams as you approach retirement age. The clear benefit here is that you will still be able to live in your home with the plan of not having a mortgage in the future.

If you’re keen to be mortgage-free as soon as possible, overpaying can have a big impact, particularly while interest rates are low. Some of a standard repayment will be paying interest, while overpayments will go to paying down your loan, meaning it’ll decrease quicker. You should check your mortgage here, as you may face additional charges to overpay or if you overpay past a certain threshold.

Take a lump sum from your pension

Once you reach the age of 55 you can access your pension. From this point you can take a lump sum out of your retirement savings, usually, only the first 25% will be tax-free. If you’ve built up your pension savings over your working life, it could give you an opportunity to pay off your mortgage and start retirement life without having to worry about making repayments.

If you’re considering this option, it’s important to consider how it will affect your income for the rest of your life. Paying off your mortgage can improve your long-term financial security, but you may have less to live on as a result.

Downsize

Depending on the level of equity you own in your current home, downsizing could help you eliminate a mortgage, or reduce the repayments you need to make. Using the sale price of your existing property to purchase one outright can give you peace of mind, and may even free up additional cash that could support your retirement ambitions.

You’ll also have to think about the emotional attachment you may have to your existing property and the extra costs associated with moving, such as solicitor fees and Stamp Duty.

Use Equity Release

Equity Release is the term used to describe a group of products that allow you to sell equity within your home, while still retaining the right to live there. The most common type of Equity Release is a Lifetime Mortgage.

A Lifetime Mortgage can pay either a lump sum or several, smaller amounts to you. For retirees with a mortgage still to pay, a lump sum can give you the opportunity to pay off the remaining debt and live without repayments during retirement. Depending on your mortgage, equity and property value, it’s an option that can be used to fund retirement too.

Equity Release isn’t the right option for everyone and there are some downsides to consider. For example, it would limit your ability to move home and may reduce the inheritance you leave loved ones. Before you proceed with Equity Release, you should speak to a professional about your options.

Take out an interest-only mortgage

To accommodate the growing number of retirees paying a mortgage, interest-only mortgages have been increasing. One of these options is the retirement interest-only mortgage (RIO). As the name suggests, your repayments wouldn’t be paying off any more of the loan but just the interest on it. It means you’ll have to continue making repayments throughout retirement but can drastically reduce the amount you’re spending, and means you can remain in your current home.

The amount still owed on your mortgage will usually be paid back once the house has been sold when you die or enter long-term care.

If you’re worried about how you’ll continue to repay your mortgage once you’ve given up work, or want to reduce your outgoings, we can help. Mortgages can seem complex, even more so when you’re at retirement age, but we’ll help you understand which option is right for you.