When you took out your mortgage, you might not have been thinking about where you’d be at the end of the term. Your priority was likely to find the best deal you could at the time, rather than thinking about wider financial concerns, such as if you’d be paying your home loan off in retirement.
If this sounds like you, then you’re far from alone. New research published in September from financial industry body UK Finance showed that more than 50% of new mortgage lending in 2021 had terms that would last beyond the main borrower’s 65th birthday.
This may not sound like a terrible situation; after all, you knew how old you would be when you finally paid off your mortgage, and it’s simply a matter of continuing to make your payments.
However, what you may not have thought about is what it would mean to have to make these payments at a time in your life when your income has dropped as, in all likelihood, you’d be making your repayments from your pension.
That’s why your mortgage may put more of a strain on your pension pot in retirement than you may have realised.
Pension targets often depend on being mortgage-free
There’s no “one size fits all” approach for pension planning because, often, the amount you’ll need is determined by your personal goals.
Common strategies include saving 12% or even 24% of your earnings to ensure your pot is big enough, while others suggest that you’ll need as much as two-thirds of your working earnings to support your current lifestyle in retirement.
However, these estimates are usually based around retirement goals and presume that retirees don’t have a mortgage to pay off by the time they finish work. In reality, this is a prevalent situation, and one that could have a serious financial impact for you.
Imagine that you had fixed monthly mortgage payments of £700. While you and your partner are working, this is a manageable obligation that you’re both able to meet.
However, if you retired at 67 with a mortgage that doesn’t end until you turn 70, that means you have three years of mortgage payments to make at a time when your income will likely drop.
Based on this example, you would need an extra £25,200 in your pension pot just to cover your housing costs for those three years.
As a result, those pension targets may not be sufficient for both meeting your goals and paying off the costs of your mortgage once you’re no longer working.
Over-55s taking out home loans
This situation could easily become more commonplace in the next few years, as house prices creep up and individuals start to take mortgages in later life.
Indeed, the UK Finance research shows that mortgage lending for over-55s has grown more than other sectors in the past five years, despite gross lending in the wider market having been fairly subdued in comparison.
A 55-year-old taking a 20-year mortgage could see them paying for their mortgage from their pension for 10 years or more, depending on how old they are when they retire.
What you could do if this describes you
If you’re headed towards retirement with a mortgage, there are a few strategies you could consider to reduce the impact that your payments will have on your pension.
Continue working
The first option you have for covering the gap is to continue working. You could choose to simply retire once your mortgage is paid off or until you’re confident that your pension will be sufficient to fund your lifestyle alongside those repayments.
Of course, it may have been your plan to retire by the standard retirement age of 66 or even earlier, and so this strategy means you may not be living the retirement lifestyle that you had always wanted.
Increase your pension contributions
If you’re intent on retiring at a certain age, you could consider increasing your pension contributions for the remainder of your working life.
These extra contributions, alongside the tax relief and potential investment returns on offer, could bump up your entire fund to the point where it can sustain having to make mortgage payments in your retirement.
Of course, it’s worth bearing in mind that your pension investments could fall in value rather than rise. It’s often sensible to take financial advice to make sure this is the right decision for you.
Consider making overpayments on your mortgage
You could consider making overpayments on your mortgage to try and pay it off with your work income before you retire. At the very least, this would decrease the amount left that you had to pay, even if you didn’t manage to pay it off entirely.
By overpaying from your income while you’re still working, you’d be able to save your pension pot for your retirement plans as intended.
Some mortgage deals come with early repayment charges (ERCs), so check with your lender before you make an overpayment, as paying charges may make this a less cost-efficient method.
Downsize your home
Another option you could explore is downsizing to a smaller home when you retire.
Smaller homes are generally cheaper, so you’ll likely make a profit by selling your home and moving into a cheaper one. You could then use this money to pay off the rest of your mortgage, allowing you to use your pension to achieve your retirement goals.
Bear in mind that there may be costs associated with moving, such as Stamp Duty and estate agent fees. This could reduce the amount you receive from your sale.
Speak to a mortgage adviser
Arguably the most sensible course of action is to speak to a professional mortgage adviser.
A mortgage adviser will be able to help you come to a decision based on your wider financial situation, offering personalised advice that works for you.
At Digney Grant, we have years of experience in helping people find the right mortgage deals for them. We’re financial planners as well as mortgage brokers and advisers, meaning we’ll look at your entire financial situation when helping you come to a decision.
Work with us
If you’d like to find out more about how we could help you at Digney Grant, please get in touch.
Email hello@digneygrantfp.com or call +44 (0)28 3082 8880 to find out more.
Please note:
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
