How to pay off your mortgage

BEING mortgage-free is the ultimate money goal. But the reality today is that many of us will be paying our mortgage off well into retirement.

There are lots of reasons behind this - people are getting on the housing ladder later in life, divorce can mean buying a property and getting a new mortgage in your 50s, or even 60s.

There are also thousands of borrowers paying an interest-only mortgage who will have no means to repay the capital when the term ends.

Nearly one in five mortgage customers have an interest-only mortgage, according to the Financial Conduct Authority.

They represent 17.6% of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment.

Here we look at four options for those with balances large and small.

Is Equity Release right for you? Find out more here

Help from lenders

Banks and building societies have shifted the way they deal with older customers, along with changing borrowing patterns. In recent years, many have increased their maximum lending ages which used to be capped at 65.

Today lenders will go to age 85 and 90 - and there’s one bank - Aldermore - that will lend until age 99 in some cases.These changes will be a lifeline to those who need to keep their mortgage going for longer. Further, a new type of mortgage has been designed just for those in retirement.

The retirement interest-only mortgage (RIO) allows older homeowners to make monthly interest mortgage payments until they die or go into long-term care. The lender receives the capital they are owed when the property is sold - there is no end date or term, so can take a borrower through to the end of their life.

So far they are only available from a handful of regional building societies including Tipton & Coseley Building Society, Bath Building Society and Hodge Lifetime. But with Nationwide currently trialling a RIO with a view to launch to all sometime this year, there could be one available on the high street in the not-too-distant future.

Raid your pension

It is estimated that around 300,000 homeowners aged between 51 and 65 are planning to use pension savings to pay off their mortgages.

The pension freedoms, available to people aged 55 and over, means that it’s possible to access pension money directly.

But think carefully before dipping into your savings as it will eat into your retirement fund and could leave you short.

If it will take more than the 25% tax-free lump sum to pay off your mortgage, remember that the remaining 75% of your pension savings is subject to income tax. You must be prepared to face a big bill if you go down this route, and it could put you in a higher income tax bracket.

Equity release

Equity release is a popular option for those faced with needing to pay off a mortgage if there is insufficient income to service a new mortgage.

Under the terms of the loan - taken against the value of your home for those aged over 55 - it allows you to stay in and own the house.

Five equity release pitfalls to avoid

Downsizing

Selling up and buying a smaller property is an option - but it’s not always straightforward if you don’t have enough equity in your home to buy another, outright.

Eddie Risby, 61, found himself in this situation last year after the family home was sold following his divorce.

Eddie, who works in the energy industry, says: “After separating from my wife, I was left with around £125,000 to get a new home. Instead of opting for a mortgage, which can be tricky at the age of 61, I bought through shared ownership. I thought it was just something for young people. But when I looked into it, it was the perfect solution.”

He paid £93,000 for a 35% share of his new flat at Clarion’s Unity Gardens scheme. Eddie’s monthly outgoing are around £560, including rent and service charges. Eddie adds: “Had it not been for shared ownership, I would’ve had to rent privately which would have been around double what I pay now, plus I wouldn’t have had any security. I am in a stable position, in an location I am happy with.”

Always seek advice

An independent mortgage broker can help to identify the best mortgage for your needs and access deals that you could not otherwise find. It’s also important to seek advice if you’re thinking about equity release as it might not be the best option for you.

Search for a mortgage adviser in your area using Unbiased or VouchedFor.

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