Should I Pay Off My Mortgage Before I Retire?September 25th, 2013
Economically and socially, many over 55’s are finding times hard adapting to the vastly changing technology based landscape we live in today. Is it now a young person’s dream, or possibly an older person’s nightmare, for those reaching retirement age without the best laid plans ahead of them? It is becoming increasingly common for people carrying over pre-existing mortgages into their retirement years, whether they like it or not. The question confronting these mortgagors is whether it advisable to pay off this mortgage before reaching retirement, or not?
The answer to this depends on several factors and individual circumstances determine the best option. Obviously the first area to assess is how much retirement savings have been collated and where these investment funds lie? Most people will have used some form of pension plan, be it a personal or stakeholder pension scheme or even better a company pension scheme provided by their employer. Whichever is used, a full analysis needs to be undertaken to assess how much of a tax free lump sum would be made available. This capital can then be taken into account during the decision making process of whether to repay the mortgage or not.
Furthermore, retirement income has also got to be the main factor moving forward and a full assessment of how much retirement income will be required. Establishing affordability in retirement is a prime objective as no one wants to have to struggle financially for the rest of their lives. Should income drop significantly upon reaching retirement, then questions that need to be asked are: –
• Should retirement savings be utilised to reduce, or even redeem the mortgage? This effectively will eliminate a large regular monthly commitment from the household budget. However, at the same time it could exhaust any future retirement emergency fund and leave a shortage of cash availability for future expenses such as home improvements.
• Some banks or lenders may consider extending the term of the mortgage if you intend to continue working after retirement.
• Should the mortgage be switched onto an interest only lifetime mortgage basis? If a repayment mortgage is held at retirement, then an option to reduce outgoings at pension age could be to remortgage. With equity release companies such as Stonehaven, more2life and Hodge Lifetime all providing interest only solutions, then consideration could be given to these three.
• Should there only be a short term left on the mortgage, then it may be worthwhile seeing out the mortgage to its conclusion. Enduring some pain at the outset of retirement, may pay dividends later once the whole mortgage is repaid. This will normally be down to the lending criteria of the mortgagee. However, if you can buy sufficient time to repay, or even repay quicker than normal via the tax free cash from a pension or maturing endowment, then all the better.
• Where affordability cannot be established and financial difficulties would certainly arise in the long term, then consideration must be given to downsizing. This could free up equity, which could either repay or reduce the mortgage to a more manageable level in retirement.
• Equity release could come to the rescue. Should the existing mortgage be small enough to fit equity release lending criteria, then by applying for equity release would enable repayment of the mortgage and mean NO future monthly payments. Obviously, this should be discussed with the children as ultimately you are spending some, or all of the inheritance by using this repayment method.
There are many ways to tackle an existing mortgage at retirement. Each option has its own pros and cons and its suitability will depend on a number of individual factors. A specialist financial advisor can help you understand different options and weigh them up before you can make the right decision for the future.