How Can I Repay My Mortgage if I am Going to Retire?
Whilst lots of younger people might be surprised to learn that people over the age of 50 are concerned about their finances, an increasing number of pensioners are now more concerned than ever about their pension, savings and income.
Despite the fact that house prices have grown significantly during their lifetime, a lot of people over the age of 50 are struggling to keep up with the increase in the cost of living.
Some are struggling to pay off the remainder of their pre-existing mortgage, whereas others are struggling to pay their bills or pay for much needed home improvements or home renovations. Others might be struggling to pay off debt.
For many retirees-to-be, knowing how they are going to fund their retirement lifetime or pay off the remainder of their existing mortgage causes them great concern and anxiety.
In fact, a study carried out by The Money and Mental Health Policy Institute found that an increasing number of over 50s are worried about their mental health when it comes to their mortgage repayments, especially considering that being over 50 means that you are less likely to get an attractive mortgage deal [1].
If you are entering your retirement but are worried about how you might be able to afford to pay your mortgage, then it is important to understand that there are a number of options available to you.
One of these options is to release equity from your home and use the cash you receive from your equity release plan to pay off the remainder of your pre-existing mortgage.
Your options around equity release are discussed further below in this article, along with a range of other alternative options available to you.
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Can I retire if I still have a pre-existing mortgage?
Yes, if you still have a remaining amount to pay off on your pre-existing mortgage then you are still able to retire.
However, depending on your savings, private pension income or state pension income you might struggle to keep up with your mortgage repayments.
Before retiring, it is important to understand how much money you have left on your pre-existing mortgage, how long your current mortgage deal is for, what current interest rates are and whether you can comfortably afford to live and pay off your mortgage on your pension income or savings alone.
Jumping from having income to relying on your pension income can be a scary jump, especially if you wish to live a comfortable lifestyle in your retirement.
This is especially tricky if you still have a pre-existing mortgage to pay off.
Some people choose to continue to work for a bit longer, until they have paid off their mortgage or until they have enough savings to pay off their mortgage in one large lump sum.
However, it is important to understand whether your lender will charge you an early or over repayment fee when paying off your mortgage in full.
When it comes to re-mortgaging your property, your lender will want to see evidence (either in the form of pension income or savings) that you can afford to maintain your mortgage payments.
They will also likely hold and affordability and threshold test, to check that you will not be too stretched whilst paying off your mortgage.
If you are nearing retirement and are concerned about how you will be able to keep up with mortgage payments, then make sure that you speak with your mortgage adviser or to a member of the Equity Release Warehouse team who will be able to talk you through all of your options, including opting for an equity release plan such as a lifetime mortgage or home reversion plan.
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How can I repay my mortgage and retire at the same time?
If you are nearing your retirement but are anxious about how you might be able to pay off your pre-existing mortgage off of your pension income, then there are a number of options available to you to help you to keep up with the mortgage repayments.
Whilst all of the below options are ways to help you pay off your mortgage during retirement, not all of them might be right for you, your family and your specific circumstances.
1. Use your pension to repay your mortgage
You are currently able to gain access to your defined contribution pension from the age of 55 years old across the UK, which is set to rise to 57 years old by 2028.
You are able to take up to 25% of your pension either in a drawdown plan or one large jump sum. This will be tax free and available to most people with a defined contribution pension [2].
Many people who opt for this use this drawdown plan or lump sum to pay off their mortgage in full, or to overpay on their mortgage so that it drawdowns faster. For a lot of people, this option works well.
However, it is important to consider the fact that by paying off your pre-existing mortgage early in one large lump sum, you might be charged an early repayment charge or fee] (ERC).
This is usually a percentage of your remaining and outstanding mortgage amount, although it varies from lender to lender.
It is also important to consider the fact that by withdrawing from your pension pot early, this does mean that your overall pension pot and any interest you have been benefiting from will be reduced for your future self.
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2. Use your savings to repay your mortgage
Others who are lucky enough to have enough money in their savings to pay off the remainder of their pre-existing mortgage might choose to do so.
This might be a better option than withdrawing from your pension early, as doing so could make life harder for yourself in the future.
It is important to remember that by the age of 55, you should have paid off a substantial amount of your mortgage, so the amount of pay off in one large jump sum might not be as much as you would initially think.
However, try to avoid using all of your savings to pay off your pre-existing mortgage.
You never want to leave yourself with nothing in the bank when going into retirement, as it is always good to allow yourself to have a bit of a buffer for a rainy day, such as the boiler breaking down or a costly MOT or service on your car.
Most experts say that you should have at least 3 – 6 months worth of income in an easy access savings account at all times to account for a rainy day, although this will largely depend on your lifestyle and your specific circumstances.
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3. Sell up and downsize your home to pay off your mortgage
If you are worried about paying off your pre-existing mortgage, then you should consider downsizing to pay it off.
Most people who are looking to retire downsize their property anyway, as they simply do not need a large house and might not be able to live in a property with stairs as they grow older.
For this reason, many people entering retirement age choose to sell up and downsize their property, often moving to a smaller bungalow, cottage or annex as they hit retirement age.
Not only will a smaller property be easier for you to get around and maintain as you get older, but it will also mean that you profit from the sale of your old home.
For some people, they might be able to downsize their property and pay in cash via the proceeds from the sale of their home.
4. Reduce your outgoings to pay off your mortgage
If you are concerned about how you might be able to afford paying off your pre-existing mortgage when you retire, then you might want to consider reducing your outgoings as much as possible to ensure that you can keep up with your monthly mortgage repayments.
For some people, this might involve shopping at a cheaper supermarket, cancelling subscriptions to the likes of Netflix, Disney+ or Amazon Prime, or even shopping around for better deals on your phone, car, insurance, gas or electricity.
One of the best things that you can do when you’re looking to reduce your outgoings is to both shop around for better deals, and go through your bank statements to ensure that you are not overpaying for anything or paying for anything you’re not aware of.
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4. Using equity release to repay your mortgage
Last but by no means least, lots of people up and down the country are opting to pay off their pre-existing mortgage by opting for an equity release loan.
Many pensioners are able to do so and release a significant amount of cash from their property due to the property boom many over 55s have experienced.
When you release equity from your home, you will receive either one large lump sum or a number of smaller payments, known as a drawdown plan.
The money that you receive is money that has built up in your home over the years.
This will include things such as the initial deposit you put down on the property, the monthly mortgage payments you have been making (minus any interest, of course) as well as any amount that the house has increased in value over the years [3].
If you have lived in your property for a number of years, then you should have a significant amount of equity built up in your property.
With equity release, you get the chance to release this money tax free. You are free to spend the money on whatever you want, and only have to repay the equity release loan once you pass away or move into a care home.
When you do so, the property will be sold and the income from the sale of the home will be used to pay off the equity release loan in full.
Many people use the equity release cash that they receive to pay off their pre-existing mortgage.
In fact, if you do opt for an equity release loan then most lenders will ask you to use the money that you receive to pay off your pre-existing mortgage in full anyway.
It is however important to understand that with all equity release loans across the UK, you will be charged interest.
This interest will be fixed but will compound year on year. This means that the overall loan amount will increase the longer you live. As equity release loans continue for as long as you live, this could add up to a significant amount.
The proceeds from the sale of your home will almost always pay off the equity release loan in full, including any compound interest. However, even if it does not, then you will be protected by the no negative equity guarantee.
This guarantee ensures that if there is a shortfall, your lender will always be responsible for paying off any difference and not your loved ones or next of kin.
This is a standard feature set across all loans by the Equity Release Council, the council responsible for setting standards across the industry.
There are two main types of equity release loans across the UK, known as lifetime mortgages and home reversion plans. For more information on each type of equity release loan, head to our website.
Please call our 24-Hour Helpline: 0330 058 1579
Speak to Equity Release Warehouse
If you are concerned about how you might be able to pay off your mortgage as you head into retirement, then speak to a member of the team at Equity Release Warehouse.
Our team will talk you through the advantages and disadvantages of opting for equity release and using it to pay off your mortgage.
Speak to our friendly and helpful team today by calling us on 0330 058 1579 or by visiting our website online for more information by searching for www.equityreleasewarehouse.com.
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