Do I need to pay off my mortgage when I retire?

The harsh reality is that a growing number of borrowers won’t be able to pay off their mortgage once they have retired and stopped earning.

The reason for this is people are taking longer to get on to the property ladder. Plus, lifestyle changes, including divorce, can mean people need longer to pay off their loan. In other cases, some people may have taken out an interest-only mortgage and now don’t have the savings available to pay off the outstanding loan.

Borrowing in your 50s or older has never been easy or straightforward. The reason being is that age and security of income comes into play when a lender reviews your request. However, things are changing. More lenders are now recognising a flexible approach may be required. Previously, lenders would usually refuse to give a new mortgage to anyone aged over 65. But, in recent years, many have increased their maximum lending ages.

This is because the average life expectancy is rising and more people are working longer, so banks, and more common building societies have recognised that previous cut-off ages are no longer appropriate. These days, even where borrowers have retired, many will still have sufficient income to repay a mortgage.

And it’s a good thing too, as some have been faced with having to sell their home when their bank refused to lend to them into retirement. The details are very specific and intricate for some to get through, which is why it can be important to get in touch with a financial adviser, before you end up dealing with this alone. Click HERE if you’d like a quick chat about it yourself.

Interest-only mortgages

What’s an interest-only mortgage? Well, it basically means you only pay the interest to your lender every month. You only pay off the amount you borrowed to buy the property once the mortgage has ended. This also means people have to set up a separate repayment plan to have enough money saved to pay the capital off at the end.

It was common practice for people to pay into an endowment, a type of investment product, that was meant to be used once the mortgage ended and you needed to pay off the final loan. However, the issues arose when the endowments didn’t perform as expected leaving a lot of people without enough money to cover the final amount. Again, it’s all very tricky, which is why so many people these days are turning to the aid of a financial adviser.

Retirement interest-only mortgages

There is some good news in all of this chaos. The FCA has enabled lenders to now be more flexible when lending to older people. Which has seen the development of the ‘retirement interest-only mortgage (RIO)’. Unlike conventional mortgages there is no fixed end date with the RIO mortgage. Therefore, older homeowners just need to make the monthly interest payments until they die or go into long term care, then the capital will be repaid once the property is sold. The market is still relatively new, but it’s certainly a turn in the right direction, given rising life expectancy and the delayed climb onto the property ladder. 

Equity release

Another option is equity release: a loan taken against the value of your home. The most common form of equity release is a Lifetime Mortgage.

A Lifetime Mortgage provides tax-free funds for 55+ homeowners, at either a variable or fixed rate or interest. This can be paid as a lump sum or as instalments.

You retain 100% ownership of your home and the loan is paid back either when you go into long-term care or when you pass away. Interest can be rolled up and added to the loan or you can make interest repayments each month.

For more advice on mortgages, get in touch with us on 01609 768798. Or arrange a call back and one of our mortgage advisers will be happy to help.

Reference – BL073 – Aug – 2019

The content of this article is for general information only and should not be considered advice.  Professional advice relating to your individual circumstances should always be sought prior to making any decisions or taking any action. Equity Release is not suitable for everyone. You should seek advice to ensure that you fully understand all implications for you and your home and for anyone who might otherwise inherit the property. Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it. All details were correct at the time of writing.