You repay your mortgage diligently every month in the hope that you'll comfortably pay it off by the time you retire. But are you confident that you'll actually be able to achieve that? Terms can be extended, and if you get a mortgage in your thirties, that 35-year term could edge over into your post-work years. This is why those set repayments may not be enough, and could explain why some people are looking at alternatives.
Research from Partnership has revealed that, while the majority of 40-70 year-olds with mortgages intend to meet their obligations via monthly repayments (71%), a further 25% will be looking to make additional lump sum contributions to clear their mortgage debt.
Overpaying could be a sensible choice, as not only could it reduce your mortgage balance and help you move into a lower loan-to-value bracket sooner than you were expecting, but you could also save on interest costs – and ideally pay off your mortgage sooner. Given that mortgage rates are so low at the moment, it's a great time to consider it, as your repayments could start to edge up when rates begin to rise.
But what if you haven't got the available funds to overpay? This could explain why some people will be turning to their pension. In fact, 9% of respondents intend to use their retirement savings – either the entire pot or tax-free cash – in order to repay their mortgage, and while this could be an effective way to become debt-free, it could also mean that they're left without an income during retirement.
However, some people don't even have this option, with 8% intending to rely on an inheritance to repay the outstanding balance on their home, while 7% confessed that they didn't know how they'd meet their obligations. That's why it's vital to have a plan in place, and you may find that other options present themselves – what about downsizing to a smaller property, for example, or even thinking about equity release? Using your pension may be an option, but if you'll need it for an income, it'd be wise to look to alternatives.
"While a debt-free retirement is the ideal, some people may find they reach traditional retirement age with an outstanding balance," said Andrew Megson, managing director of Retirement at Partnership. "Using their pension may well seem like an option, but it is not the only one, as working longer, downsizing or considering a lifetime mortgage may be more appropriate. Ideally, pension savings should be used to provide an income in retirement, and with the state pension only providing a very basic safety net, making this choice could lead to hardship in later life."
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