How to pay off your mortgage when you retire

In an ideal world everyone would enter retirement mortgage-free, but with the average age of first-time buyers increasing, along with rising house prices and longer mortgage terms, many will be entering their post-work years still with outstanding mortgages.

In the excitement of taking the first step onto the property ladder or moving on to buy a dream home, many can overlook the need to ensure that they have repaid their mortgage before they retire. Instead, to bring down their monthly repayment costs, homeowners may choose a 30 year mortgage term, which will see their mortgage repayments last beyond the state pension age, which is currently 66.

For those who are on a mortgage term that will last into their planned retirement, increasing mortgage repayments can be a good way of paying off the mortgage early. Not all mortgage deals allow overpayments without a penalty, so it is important that those considering this option check their current deal’s terms and conditions to ensure that this is possible. Alternatively, when looking to lock into a new deal, borrowers should ensure that overpayments are allowed and might want to considering speaking to a mortgage broker who will be able to highlight deals that allow penalty-free overpayments.

Alternatively, when remortgaging, borrowers can look to lower the term of the mortgage so that it ends before they retire. This will likely result in higher monthly repayments but will mean that the mortgage is cleared by the time the borrower retires.

Homeowners who have been unable to fully clear their mortgage but who only have a small amount left to repay and who are nearing retirement could consider using their pension fund to pay off their mortgage. Retirees can withdraw up to 25% of their pension fund tax-free as a lump sum, which could be a way of paying off the mortgage. Those considering this option should, however, keep in mind that it will reduce their retirement income and, as such, may want to speak to an independent financial advisor first.

Another option for those retiring with a small mortgage is to use savings to clear the debt. Although this option may leave retirees without an emergency savings fund to fall back on in the event of unexpected costs, it will mean they do not have to use their pension savings.

New retirees who do not want to use their pension or savings to repay their mortgage can, instead, consider downsizing to a smaller, cheaper property. Downsizing to a small property that can be bought mortgage-free will not only clear the mortgage debt, but a smaller home will also likely be cheaper to run, which will help to reduce monthly outgoings during retirement.

Retirees who do not want to move home, but do not have the option of using their pension fund or savings to repay their mortgage can consider equity release, which allows homeowners to borrow money using the equity they have in their home. The money borrowed through equity release can then be used to repay the mortgage and, as the equity release loan does not have to repaid during the borrower’s lifetime, unless they move into permanent care, they do not have to worry about monthly repayments. Equity release does, however, have a long-term financial impact, including on the inheritance the borrower leaves behind, as such it is important that it is considered carefully before borrowing through equity release and homeowners should speak to an independent financial advisor first.

Those who have been making interest-only repayments on their mortgage will likely find that when it comes to retirement, they are faced with a hefty mortgage loan that needs to be repaid. Ideally, these borrowers will have savings or investments that can be used to clear the debt once the mortgage term ends. Those who are not able to repay their mortgage can, instead, consider a retirement interest only mortgage (RIO). These mortgages are a hybrid of interest-only mortgages and equity release – they require the borrower to make monthly interest repayments and then the mortgage is repaid when the house is sold.