Metis AM
Following several years of rising costs and interest rates, more people are expecting to continue repaying their mortgage past the State Pension Age.
A recent survey reported by Mortgage Strategy found that 13% of Gen X (people aged between 42 and 58) said they didn’t expect to have paid off their mortgage by age 67. The percentage rose to 26% for those living in London.
While repaying your mortgage during your retirement isn’t necessarily a bad thing, it can have an impact on how you use your pension savings and even on the inheritance you are able to leave loved ones after you pass away.
Read on to learn more about how ongoing mortgage repayments could affect your retirement plans and discover some practical steps you could take to mitigate the impact.
It’s important to factor ongoing mortgage repayments into your retirement plan
When creating your financial plan, your planner will take into account any anticipated expenses that you may have in retirement.
However, if your circumstances have changed – for example if you have extended the term of your mortgage or taken out a new mortgage since you created the plan – then your forecast may not have factored these repayments into the calculations.
If this is the case, there are a few ways the repayments could affect you.
1. You may need to use your pension savings to pay off your mortgage
If you are still repaying your mortgage after you have retired, you may need to allocate some of your pension savings to cover the monthly repayments. This can mean that you need to use more of your pension savings in the early years of your retirement than you had originally planned.
If this is to be the case, it’s important to factor your mortgage repayments into your calculations about your income needs until the mortgage is paid off. This can help you to budget appropriately and withdraw the right amount each year from your pension to cover your costs.
2. You might need to stay in work for longer to repay your mortgage
If you don’t want to use your pension savings to cover your mortgage repayments, you may wish to explore other ways of ensuring you have sufficient income to cover the repayments. This might mean staying in work for slightly longer than you anticipated or considering a phased retirement.
A phased retirement might involve:
- Taking a new, part-time job
- Reducing your hours at your current job
- Starting your own business or working as a consultant.
These are just a few ways you could remain in work and earn an income while beginning to enjoy a little more leisure time as you work towards full retirement.
3. It could take longer to achieve your long-term goals
You may have plans about how you’d like to use your retirement savings. These could include travelling, taking up new hobbies, or enjoying quality time with your family.
Whether you choose to use your pension savings or stay in work for longer to maintain an income, one outcome of needing to repay your mortgage for longer is that it could delay achieving these goals.
4. You may have less to leave your loved ones as an inheritance
Using your pension savings or other investments and savings to pay your mortgage could reduce the value of your estate, meaning you could have less to leave your loved ones as an inheritance after you pass away. Of course, you can still pass your property to your chosen beneficiaries on your death.
4 practical steps that could help to mitigate the impact of mortgage repayments on your retirement plans
Fortunately, there are some practical steps you could take to mitigate the impact of ongoing mortgage payments on your retirement plans.
1. Overpay your mortgage while you’re still working
If you’re able to overpay your mortgage (subject to any restrictions or charges from your lender), this could help you pay it off sooner. In doing so, you may be able to repay your mortgage before your retirement date.
This can help you free up your pension savings to spend on achieving your retirement goals, and could have the added benefit of reducing the amount of interest you pay on your mortgage overall.
2. Use other savings or investments to repay the mortgage
If you have other savings or investments, it might make sense to consider using these to reduce your mortgage debt or pay it off altogether. Though this will reduce the value of your assets, it might make financial sense in the long run by reducing both the amount of interest you pay on your mortgage and the monthly expenses you need to cover after you have retired.
Remember to check with your lender whether any restrictions or charges may apply if you choose to do this. It might also be sensible to consult your financial planner to decide if this is a sensible way to use your savings, particularly if they had originally been intended to fund something else.
3. Downsize your home
Another way you could reduce your mortgage debt is to downsize your home. By downsizing, you could pay back some or all of the remaining balance on your mortgage without needing to dip into your savings or pension.
This isn’t right for everyone though, as it would mean selling your existing property, which you might wish to keep in the family. So, think carefully before making this decision.
4. Consider an offset mortgage
An offset mortgage means that your existing savings could help you to repay your mortgage sooner.
Rather than using your savings to pay off the mortgage, your lender will simply subtract the value of your savings from the total amount that you owe on the mortgage. While you won’t earn interest on your savings, this could reduce the total amount of interest you pay on your mortgage, helping you to repay it more quickly.
There are advantages and disadvantages to this type of mortgage, and it isn’t suitable for everyone, so make sure you consult your financial planner for guidance before making your decision.
Get in touch
If you’re concerned about how mortgage debt could affect your retirement plans, we can help you to assess your options and make the right choice for you.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
The value of your investments (and any income from them) 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.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Think carefully before securing other debts against your home.
