By Tom Philips at April 24, 2024

How to Pay Off Your Mortgage in Retirement

A couple of decades ago, it was incredibly normal for people to pay off their mortgage by the time they hit retirement [1].

However, this is no longer the norm. Baby boomers, who were born between 1946 and 1965 are a lot more likely to have taken out larger mortgages than older generations.

In fact, a study by Uswitch [2] found that just over 4% of all homeowners over the age of 65 years old are still having to pay off their mortgage each month [2].

This means that a significant number of retirees are still paying off their mortgage, unless they have come into some money or help along the way.

With this being the case, more and more retirees are looking for ways to pay off their pension once and for all during their retirement.

Naturally, this will depend on the size of your mortgage, and whether or not you have an income or any savings [1].

Whilst paying off your mortgage might be a great idea and will certainly cut down your monthly outgoings, spending your entire life savings on paying off a mortgage might not be the best use of your money, especially later in life.

Whether or not retirees should pay off their mortgage later in life depends on a number of factors. Most notably, it will depend on your specific circumstances, including your family life and your personal circumstances.

When paying off your mortgage may make sense

There are certain circumstances when paying off your mortgage in full, later in life makes a lot of sense.

In fact, paying off your mortgage will help save you hundreds, if not thousands of pounds each month. By paying off your mortgage, you will give yourself peace of mind for the rest of your retirement that you will have enough money to live.

Paying off your mortgage in full can make complete sense if you come into some extra money, including inheritance. You could use this lump sum of money to pay off your mortgage, rather than spending it on a holiday or a nice car.

You should also consider paying off your mortgage in retirement if you have a substantial amount of money in your combined savings.

You should certainly be considering this if the funds are in a taxable account, and are not earning you much interest.

If you are downsizing, then it might also be a good idea to pay off your mortgage, or some of your mortgage with the funds from the sale of your old home.

Naturally, if you sell your home to downsize to a smaller one, then you will bank a lot of cash from the sale.

This might mean that your new property only has a small mortgage, which you’re able to pay off with the proceeds from the sale of your home.

If you are considering paying off your mortgage and are in a position to do so, then you should always seek the advice of a qualified financial or retirement adviser.

When paying off your mortgage may not make sense

Whilst there are a few situations where paying off your mortgage might make sense, there are a few situations where paying off your mortgage is not a wise decision.

Some people might argue that paying off your mortgage is not the best way to spend your money later in life.

Whilst owning a home in itself is a great investment, and not having a mortgage later in life will certainly help to keep your monthly outgoings lower, some might argue that investing your money is a better use of your savings [3].

However, this strategy only works if you invest your money wisely. This is why you should always speak to a financial adviser before you choose to invest your money.

You should always check to see what the returns would be, and invest wisely depending on your risk appetite.

Usually, the older you get, the higher the investment risk, so the more careful you need to be about how you invest your money.

Likewise, you should not plan to pay off your mortgage in full if doing so would use up all of your savings.

You should always leave yourself some money for emergencies or for a rainy day. Make sure that you speak to a financial or mortgage adviser about paying off your mortgage before you do so.

Using your pension to pay off your mortgage

The Pension Freedom legislation that came into effect in 2015 allows individuals to gain access to their pension funds early. This cash is then free for them to use however they want, including paying off your mortgage.

You are able to take a 25% tax free lump sum of money from your pension pot, which could be a substantial amount depending on how much you have stashed away in your pension [4].

In order to do this, you need to be aged at least 55 years old and have a personal pension or company pension. You can’t still be paying into the pot that you withdraw from, so this will need to be an old pension pot. You are able to draw down money from a range of different types of pensions, including a Defined Contribution Pension, a Defined Benefit Pension, a Local Government Pension or your own personal pension pot [5].

If you are considering doing so to pay off your mortgage, there are a number of things that you will need to consider.

For example, you will need to consider your mortgage interest rate, the amount of mortgage outstanding, and whether or not there are any other more financial savvy options available to you.

For example, downsizing your home and using the profit from the sale of your home to pay off your mortgage might be a better option.

The biggest risk with drawing down your mortgage is that you are reducing your pension income in your retirement.

People spend their entire lives saving up and contributing towards their pension. It’s important to understand that you will need to have a substantial amount in your pension to be able to withdraw from it.

It is also important to note that if you have a Defined Benefit Pension, then the Financial Conduct Authority strongly advises against releasing money from your pension early.

Using equity release to pay off my mortgage

More and more people are considering releasing equity from their home as a way of paying off the remaining amount on their mortgage.

Over the years, you build up a lot of equity in your home, meaning that many pensioners are finding themselves asset rich but cash poor [6].

Equity release allows people to release a tax free amount of cash from their home, whilst remaining as the owner of the property.

You only have to repay the amount you borrow from your home once you pass away, upon which the house will be sold. The proceeds from the sale of the home will pay off the loan in full.

It is important to understand that in order to qualify for equity release in the first place, you can only have a small amount remaining on your mortgage.

As part of your application and the terms and conditions of your loan, you will need to agree to pay off the remaining amount of your mortgage once your lump sum amount comes through.

The biggest drawback to equity release is that you are paid interest on your loan. This interest amount snowballs each month, meaning that it turns into compound interest.

This means that you will owe interest on your loan and then eventually owe interest on your interest, meaning that your overall loan amount will compound each year [6].

You do not need to repay this loan amount until after you pass away, when the house will be sold and the proceeds used to pay off the loan in full.

If for some reason your home decreases in value and no longer covers the loan amount, the lender will step in to pay the rest. This is called the no negative equity guarantee.

What are the benefits of using equity release to pay off my mortgage?

There are a number of benefits to releasing equity from your home to pay off the remaining amount on your pre-existing mortgage.

The biggest benefit to doing so is that there are no more monthly mortgage payments to make, which will free up a lot of your cash going into retirement.

Fewer outgoings will help you to budget, especially when you retire and are living off your pension.

It is important to remember that with equity release, there are no mandatory monthly payments to make. The full is paid back in full with the proceeds from the sale of the house after you pass away.

Releasing equity from your home also helps you to avoid having to downsize your home. Moving house is a huge burden, stress and worry for older homeowners.

The idea of upping sticks and moving to another, unfamiliar house can have a huge effect on pensioners who might have lived in their home for decades.

Releasing equity from your home allows you to avoid having to sell and allows you to remain living in your home until you pass away or move into a care home for health reasons.

Alternative options to paying off your mortgage

Below, we outline alternative options to help pay off your mortgage:

1. Get an income

The other alternative to downsizing, drawing from your pension or releasing equity from your home is to opt for getting an income during retirement.

There are a number of different jobs applicable to those during retirement, including working in a garden centre, being a taxi driver or working in a school.

You could also work in a local cafe, helping to make or serve drinks. Not only will working in your retirement provide you with enough income to live more comfortably, but there are also a number of health benefits associated with getting a retirement job.

For example, if you opt for a job that is particularly sociable, you will be helping to keep your mind active and engaged, which has been proven to reduce some psychiatric diseases such as Alzheimer’s or Dementia [7].

In addition to this, your physical health will also be improved, especially if you work in a physically demanding job. Your mobility and strength will be improved simply by doing a job such as serving coffee or working in a garden centre.

Whilst you might have been looking forward to retiring, getting a job alongside your pension income might provide you with enough money to pay off more of your mortgage.

Getting a retirement job can be a great way of paying off your mortgage later in life, although make sure that you don’t choose a particularly stressful job.

Stress later in life can age you, so try to avoid getting a job which you might find particularly stressful [7].

2. Reduce your outgoings

Another potential way of paying off your mortgage is to simply reduce your outgoings.

Cutting down on your outgoings is always a good idea as you enter retirement and pension age, but taking it seriously can have a huge impact on how much you are able to contribute to paying off your mortgage each month.

The best way of reducing your outgoings is to go through your bank statements over the past couple of months to see what your biggest outgoings are.

You should also check your bills, including your gas and electricity bills to see if you can get cheaper deals. You should also look to cancel some subscriptions that you might no longer need or use, including Netflix, Amazon Prime or the gym.

You do not need to cancel every outgoing that isn’t necessary. Afterall, this is your retirement that you’re supposed to enjoy.

However, simply cutting back on some unnecessary and expensive outgoings can go a long way to making a difference each month.

3. Make your home pay for itself

If you want some additional income during retirement, but do not want to work during your retirement years, then you might be able to rent a room in your home to someone else.

Whilst this option might not be appropriate or right for everyone, if you have a large home, an annex or spare room going, then you might want to rent out that space to someone else for an income.

This doesn’t have to be a stranger, instead it could be a child, a grandchild, niece or nephew or family friend who is in need of some accommodation in the area.

If you do not want to rent part of your home out to someone else, then you might be able to rent out your driveway for a fee.

This could be particularly popular if you live near an airport or football stadium.

People would be able to park their car on your drive for a fee, for a night, a week or even two weeks depending on how long they need it for. Usually, you would charge a daily fee for doing so.

How to decide what to do

There are numerous pros and cons associated with paying off your mortgage in retirement. There are also numerous other alternative options available to homeowners, which can make it confusing at times.

There are numerous things that you will need to consider before making a final decision. Some of these factors are listed and explained below for you.

1. Consider Any Overpayment Fees & Charges

It is important to always check the small print on any loan that you consider taking out.

For example, with some type of equity release loans, you will be paid an overpayment or early exit fee.

Whilst some equity release loans and mortgages will allow you to repay an extra 10% of your mortgage loan each year, some will actually charge you an early repayment charge (ERC).

Depending on the value of your property or loan amount, this could be a significant amount.

2. Consider Your Savings and Emergency Fund

You should only ever consider paying off your mortgage with your savings if you have an emergency fund in your bank account. Having an emergency fund is usually described as having around 3 – 6 months of bills, including your mortgage in your bank account.

This should be in place should you lose your job. So, when deciding whether you should pay off your mortgage or not, consider how much you have in your savings pot first.

3. Consider Any Other Debt You May Suffer From

It is important to consider whether or not you are suffering from any debt, as this will have a huge impact on whether or not you should use your money to pay off your mortgage.

If you have any other more expensive debts, of a higher amount left to pay off, or with higher interest rates, then you should look to pay these off first before considering paying off your mortgage.

Naturally, this will depend on the rate of interest you are paying on your loan or debt, compared to that of your mortgage interest rate.

For lots of people, it makes more sense to clear any other debt prior to retirement before looking to pay off your mortgage.

However, it is also important to remember that your mortgage is secured against your home, and if you do not pay your mortgage on time, then you stand the risk of having your home repossessed.

As a result, some financial advisers do recommend that you pay off your mortgage first, to give you more security going into your retirement.

4. Consider Your Goals and Aims

It is always important to think about your financial and life goals before you consider paying off your mortgage. Is it your goal to remain living in your home until you pass away?

Or, are you considering selling up and downsizing in the near to distant future anyway? Is it your goal to have more cash in the bank and savings, or to have your property tied up in assets?

These are all questions you need to consider before deciding to pay off your mortgage in full ahead of retirement.

Whilst for some, their goal might be to remain living in their home until they pass away, others might decide that they will wait until they downsize properties before paying off any debt, including their mortgage.

5. Do You Want to Consider a Combined Approach?

Deciding whether or not you should pay off your mortgage in full during retirement is not a straightforward answer.

In fact, some people argue that opting for a combined approach is often the best way forward.

With help from a financial adviser, you might be able to invest some of your money, whilst then using the returns on that money to help you to pay off your mortgage.

You could start doing this in the lead-up to your retirement, which would mean that you could end up being mortgage-free by the time you reach retirement age.

As a result of paying off your mortgage, you would then free up more income and cash to invest more money, should you choose to do so.

This strategy can be hugely beneficial to homeowners wishing to be mortgage-free by the time they hit retirement age.

Not only will this strategy allow you to clear your debt, but it will also help you to build your wealth going into retirement.

Get Advice

If you are considering using equity release to pay off your mortgage in retirement, then you should speak to a member of our team at Equity Release Warehouse.

Our team of specialists are on hand to explain all things equity release, and talk you through the pros and cons of taking out an equity release scheme.

Our team of advisers won’t ever force you to make a decision. Instead, it is only ever our aim to provide you with all of the relevant and necessary information you need to make a decision, without overwhelming you.

To speak to a member of our team, give us a call on 0330 058 1579 or by visiting our website online.