On current lending trends to homeowners over the age of 55, over half will still be paying their mortgage after their 65th birthday, putting “the dream of retirement under threat” according to one financial commentator.
UK Finance, the trade association for the UK banking and financial services sector, says this is the first time the percentage has gone past 50% since records began, and reflects the fact that people are looking to extend their working life. The Equity Release Council adds that it signifies homeowners are becoming increasingly comfortable borrowing into retirement.
However, borrowing large sums into later life poses huge risks for those who fail to keep earning after this point, either for health reasons or because they are made redundant, and might lead to borrowers dipping into their savings or pension.
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “The trend of mortgages that last into retirement means people need to invest even more into their pensions if they still want to be able to give up work and continue to meet housing costs.
“The level of state pension, as well as estimates for what people need in retirement to meet certain living standards, are usually based on the assumption that people have paid off their mortgage.
“So there is a risk that if someone does want to give up work but still has a mortgage to pay, they won’t have enough in their pension. The risk is that when you reach your sixties, you may be unable to work to earn enough to meet your mortgage payments.
“Based on a fixed monthly mortgage payment of £700, someone with a mortgage term that ends at 70 rather than 65, who retires at 67, would need an additional £25,200 in their pension pot on retirement to continue to fund their mortgage.”
“Not only is the dream of retirement under threat,” concludes Becky,“but also the dream of mortgage freedom. The two go hand in hand – having enough pension income to retire well is usually dependent on having paid off the mortgage, leaving your pension pot free to cover other living costs when you give up work.”
Test out your “mortgage vulnerability”
If your retirement plans are predicated upon paying off your mortgage into your 60s or beyond, you can test out different scenarios on the RetireEasy LifePlan to show what impact losing your job or having your income reduced would have at any point in the future. That could help you make informed decisions about your financial priorities.
