Currently, more than 6 million over 50s have an interest-only mortgage and many of them are likely to experience problems paying it off. Some are contemplating selling up in order to make up an average shortfall of more than £42,000, according to research carried out by Saga.
In addition, more than 900,000 in their 70s still have an average mortgage bill of £38,000. Carrying debt into your later years is far from ideal, and can restrict the amount of money available to fund a comfortable retirement.
What can be done?
This research highlights the need for proper financial planning and advice. Clearly, it’s important to focus on repaying your mortgage as early as possible. However, if you find yourself with a problem there are various actions you can consider to improve your situation.
Paying off the debt from savings and investments
If you have spare cash, you can make a capital repayment to reduce the amount of mortgage outstanding. With the new freedoms available under the pension legislation from April 2015, you could consider using your 25% tax-free lump sum payment to pay off the debt. However, it’s important to consider your needs in retirement too, and maintain the right balance between debt and savings.
You could switch to a repayment mortgage instead. It would mean an increase in monthly payments, but you would be paying off the capital outstanding. Your adviser will be able to tell you what deals might work for you.
Taking out a lifetime mortgage
Lenders are increasingly aware that some of their borrowers face difficulties and are developing lifetime mortgage products to avoid the risk of borrowers defaulting and the need for homes to be sold to repay the debt. Under this type of mortgage, on death, the property would be sold to repay the outstanding loan.
Selling up and downsizing
Selling your home could release enough to pay off your mortgage. Some people find this an acceptable answer, especially if they can readily find alternative accommodation that they’re happy with and able to afford.
Moving house can be an expensive and stressful process at any age. There is an alternative way of raising cash against the value of your property that means you continue to live in it. Called Equity Release, it allows you to access and benefit from the ‘equity’ or value tied up in your home.
Equity release is a complicated financial arrangement, and expert guidance is essential in making the right choice to suit your needs and those of your family.
The Financial Conduct Authority has referred to interest-only mortgages as a ‘ticking time bomb’ so if this issue affects you, the best advice is to speak to us as soon as possible.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up the repayments on your mortgage. A fee may apply for mortgage advice and, if applicable, you must ask your adviser for details before making any decision relating to a new mortgage as the actual amount will depend on your personal circumstances, but the typical amount is 1% of the loan value (on a typical £100,000 mortgage, this would be £1,000).
Equity Release is a lifetime mortgage or home reversion scheme. To understand the features and risks, ask for a personalised illustration.