How to Reduce Your Mortgage in Retirement
The length of a standard mortgage once peaked at around 25 years in duration.
This was plenty of time for your average homeowner to buy a property in their 20’s and pay off the mortgage before retirement came around.
These days, you can agree to a mortgage to last 35 years, and there are even some 40+ year mortgage terms.
Given that the current average age of a first-time buyer in the UK outside of London is 33 years old [1], it is very likely that people will be paying off their mortgage well into their retirement.
You might now be wondering how on earth you are supposed to pay off a mortgage when you are no longer in work.
Well, the good news is that there has never been so much choice for homeowners to pay off their mortgage in retirement, especially for those over 65.
If you would like to know how to reduce your mortgage in retirement, the team at Equity Release Warehouse have compiled a list of some of the most popular ways below.
Should You Pay Off Your Mortgage In Retirement?
Retirement is known as the golden decades of your life. You have finished a long life of work, and now it’s time to put your feet up and spend your time in leisure.
You may struggle to completely kick-back and relax if you have a monthly mortgage payment expected every month. The stress of knowing you need to keep repaying back on a loan could ruin your golden years.
In 2017, over 75,000 people in retirement claimed for UK government Support for Mortgage Interest [2]. For these people, retirement has become a financially stressful period in their life.
The number of people needing support in retirement for their mortgage is growing. Therefore, it is increasingly important to understand how to reduce your mortgage in retirement to avoid unnecessary stress.
If you choose to pay off your mortgage early in retirement, you will no longer have the mental and financial pressure to make that monthly payment.
Your budget will be totally freed up for the things that matter to you. Retirement should be stress free, a time spent pursuing your interests and passions.
How To Reduce Your Mortgage In Retirement – Equity Release
One of the most popular methods people cite when they are asked how to reduce your mortgage in retirement, is equity release.
Most lenders use the term equity release, other banks and lenders may refer to them as ‘later life mortgages’.
No matter what the term they use, equity release is a very easy and very effective way to reduce your mortgage in retirement.
1. What is Equity Release?
Equity release is a loan that is designed specifically for homeowners over the age of 55. To be eligible for equity release products, you must be a homeowner in the UK, be over at least 55 years old, and have a property that is worth over £70,000.
Equity release plans secure a loan against the value of your home. The equity that is available to you is the outstanding amount that is left over when you subtract your outstanding mortgage from the total current value of your home.
For example, if you have a £250,000 home, with an outstanding mortgage balance of £50,000 – you may be eligible for an equity release of £200,000.
2. Can I Get an Equity Release Plan in Retirement?
Yes! Equity release plans were designed for people in retirement. Some plans start from 55 years old, most start from 65 years old.
Many people will find it difficult to extend their current mortgage into their retirement.
Equity release is different because, with many equity release plans, you will not have to pay back any of your loan until after you have passed away and your house has been sold – and some don’t even require you to pay back anything at all.
Equity release plans have been designed specifically for people in their retirement. They are ways for you to access cash and pay off your outstanding mortgage amount to your lender, and maybe even have some left over.
4. How to Reduce Your Mortgage in Retirement with Equity Release
If you are wondering how to reduce your mortgage in retirement with equity release, you should use a free online equity release calculator to see an estimate of how much tax-free cash you could release from your home’s equity.
If the amount you receive is more than the outstanding amount of your mortgage loan, then you will be able to pay off the mortgage and have a surplus left over to use as you wish.
If the amount of equity you receive is less than the outstanding mortgage amount, then you might have to consider other means to reduce your mortgage in retirement.
If you are unsure how to reduce your mortgage in retirement because you don’t know how much of your mortgage you have left to pay off, you should request a mortgage statement from your mortgage provider.
This will outline the total amount left to pay plus any additional charges for early repayment.
If after all of this, you decide that how to reduce your mortgage in retirement is to take out an equity release plan and pay of the mortgage, then the rest is easy.
Your solicitor will be instructed to transfer your released equity to your mortgage provider to clear your existing mortgage. At that point, if there is any equity left over, the money will be transferred to you.
5. Lifetime Mortgage
One of the most common equity release plan people go for when thinking about how to reduce your mortgage in retirement is through a lifetime mortgage.
A lifetime mortgage is the most common equity release plan for retirees. When you are accepted for a lifetime mortgage, you instantly gain access to a lump sum of your home’s equity to pay off your mortgage, whilst remaining in your home.
An equity release lifetime mortgage is a low-stress option for those wondering how to reduce your mortgage in retirement. The lifetime mortgage loan is only repaid upon either your death or if you enter into full-time care.
The loan is only paid back by selling your home after one of the two previous events occurring, and the sale amount of the property is used to clear any outstanding mortgage [3].
Many people interested in how to reduce your mortgage in retirement are attracted to a lifetime mortgage for the loan repayment after death feature.
Many lifetime mortgages will come with a ‘no negative equity’ guarantee, meaning the final loan total will never exceed the total sale price of your property. This gives people peace of mind for their loved ones once they’re gone.
However, it is important to be aware of the interest that accrues on the lifetime mortgage loan amount.
Interest will be applied to the equity loan and the interest will compound during the lifetime of the loan. This may mean that the final amount that is due to be paid is more than the original equity that was released.
One option to mitigate the impact of the compounding interest is to pay off some of the interest on the loan whilst you are still alive.
This can be done as regular payments or one-off lump sum payments. Either way, it keeps the final amount of the loan lower when the time comes.
Throughout the duration of a lifetime mortgage you will remain the sole owner of the property. You will continue to occupy the property as you always have and are free to act as you please.
Lifetime mortgages come in different variations. Some popular choices are interest-only lifetime mortgage, an enhanced lifetime mortgage or a voluntary repayment plan. Each plan is unique and is suitable for the needs and circumstances of different people.
If you are interested in how to reduce your mortgage in retirement and would like to learn more about equity release, contact our Equity Release Warehouse team and talk to one of our advisors or free by calling us on: 0330 058 1579
6. Interest-Only Mortgage
An interest-only lifetime mortgage is very common with people looking at how to reduce your mortgage in retirement.
Like a lifetime mortgage, you retain homeownership of your property even after you release equity from your home. The variation is that those who opt for an interest-only mortgage will be required to pay an agreed amount of the interest during their retirement.
The actual amount of equity lent from an interest-only mortgage is not required to be repaid until you either pass away or enter into full time care. At this point, the sale of your house will cover the cost of the original loan.
An interest-only mortgage will suit certain people who are looking at how to reduce your mortgage in retirement.
If you are comfortable covering the monthly interest repayments and would like to know exactly how much your final bill will be, an interest-only mortgage may be for you.
One benefit of an interest-only mortgage compared to a more traditional mortgage is that the monthly repayments are significantly lower. This means that most lenders will have a lower income threshold for you to cover the interest monthly payments.
In addition to the agreed monthly interest-only repayments, some lenders may provide a feature that allows you to repay one-off lump sum payments to further reduce the cost of the final loan.
If you are interested in how to reduce your mortgage in retirement and would like to learn more about interest-only mortgages, contact our Equity Release Warehouse team and talk to one of our advisors or free by calling us on: 0330 058 1579
7. Home Reversion Plans
A home reversion plan provides you with access to equity tied up in your property, in exchange for a share or the entire ownership of your home.
This might sound scary considering you are looking at how to reduce your mortgage in retirement, but exchanging a share in your home does not mean you have to leave your home.
Taking out a home reversion plan allows you to continue living in the property for the rest of your life. You will remain responsible for maintaining the condition of the property.
Home reversion plans will usually apply a rate of discount when purchasing a share or all of your house from you, in exchange for equity to pay off your mortgage.
The exchange rate differs from lender to lender, so it is important to understand the discount rate before agreeing to opt into a home reversion plan.
An example of how the discount rate would apply is if your home is valued at £300,000 in the market, and you exchanged 25% of your property as part of a home reversion plan, the equity released wouldn’t actually be 25% of the house’s real value (£75,000).
A home reversion plan does not include any loan to be repaid, even after your death. The equity was exchanged for a portion of your home, so when you pass away and your house is sold, the proportion they own will go to the lender.
If you only sold part of your home for equity release, your beneficiaries will receive the remaining share of the house sale.
If you are interested in how to reduce your mortgage in retirement, and a home reversion plan sounds like it could be the one for you, speak to a member of the Equity Release Warehouse team for more information.
How To Reduce Your Mortgage in Retirement – Downsizing your Home
It may be hard to imagine moving out of your family home during your final years, but if you’re wondering how to reduce your mortgage in retirement and find yourself in a home that has excess space, then now could be a good time to move.
Downsizing is a traditional way for people entering retirement to reduce their mortgage and move to a smaller, cheaper home.
Carrying out a downsize at the start of retirement, whilst you still have the energy to do so, might be a blessing in disguise if you encounter any health issues in the future.
There are plenty of advantages to downsizing when tackling how to reduce your mortgage in retirement.
The most obvious benefit is that you will not longer have a mortgage looming over you every month. You will have cleared your mortgage and may even have some extra cash from the downsize.
Moving to a smaller or newer property may mean your bills comes down. Monthly expenditure like energy, water and council tax are all linked with the size and condition of a property.
Finally, downsizing in your retirement might be the start of an adventure as you enter your leisure years. If you are a keen gardener, tackling a brand new garden might be a great way to spend your extra hours.
Or maybe you have moved to a brand new location with lots of different lifestyle activities on your doorstep.
Downsizing might sound rather defeatist if you have been in your current home for many years. But the idea of selling up and starting a new adventure might be the best way to tackle how to reduce your mortgage in retirement.
How To Reduce Your Mortgage In Retirement – Savings & Pension
If you have worked hard and worked smart for the past few decades, chances are you might have managed to squirrel away a sum of money in your savings and pension accounts.
If you have – well done! However, it would be useful to work out if the interest you are earning on those savings equated to more or less than the interest you are accruing on your mortgage amount.
We have recently come out of a decade-long period of historically low-interest rates. This has been great for borrowing but poor for savings.
The chances are that the interest you are paying on your outstanding mortgage is greater than the interest you are earning on cash in the bank.
It would be unwise to completely empty your cash savings to pay off your mortgage, and deprive yourself of any emergency fund.
But if your situation is that you have a relatively low amount of mortgage outstanding compared to your cash savings, then it may be wise to go down this route when thinking about how to reduce your mortgage in retirement.
Check out the Money and Pensions Service for more information.
How To Reduce Your Mortgage In Retirement – Side Hustle
You may have heard the term ‘side hustle’ banded around when people talk about the extra cash Gen-Z or millennials are making outside of their normal 9-5 jobs. But side hustles are not exclusive to any one generation.
Side hustle is a rebranding of side earners, or just ‘second job’. They are jobs or activities that you could do in your spare time to make you an extra bit of cash.
When you start to plan how to reduce your mortgage in retirement, a side hustle may not be at the top of the list for clearing your mortgage, but it can’t certainly help bring it down.
If you have a valid driving licence, your own car, and the time to drive people round, firms such as Uber offer flexible working hours for people to work as taxi drivers in and around where they live. If you don’t like the idea of strangers being in your car, why not approach courier companies and take on a delivery driver gig in your spare time?
If you are an animal lover then you could start your own dog walking business. Some dog owners in the UK do this full-time, earning up to £20 per hour, per dog, every day.
You may need to invest in a bigger car and get some insurance to cover your small business, but it could be a serious way to reduce your mortgage in retirement – whilst also keeping active!
If you are good around the house, you could become a handyman (or woman) for your local area. Post your services online to community groups like Facebook and Next-door and wait for people to contact you for help. Some people can make £50 just for putting up some shelves.
There are endless ways for making extra money on the side to help reduce your mortgage in retirement. You will most likely have a skill that someone will need and is willing to pay you money for it. Check out this website for even more ideas for side hustles in retirement.
How To Reduce Your Mortgage In Retirement – Rent Out Your Home
Despite your home being the reason you are thinking about how to reduce your mortgage in retirement, your home may also be the answer.
Lots of people utilise their homes and spare space to make money from people who need the space for themselves. If you are tech savvy and are comfortable uploading profiles onto various apps and website, your house may be your ticket to reducing your mortgage in retirement – if not paying it off entirely!
If you have a spare room in your house then there are plenty of ways to monetise that excess space. You could take on a permanent lodger who pays you monthly rent.
If you don’t like the idea of having someone living with you 24/7, then you could offer up the spare room less frequently to tourists through websites like Airbnb.
Depending on your location, the quality of the room and the time of year, you could be charging hundred of pounds a night.
If you have a little more than just the one spare room then you could even go further and open up your own B&B.
This is a more sophisticated step then just letting a room out, but if you have the space, don’t mind the work and live in an area that people would like to stay, then you could make a comfortable living doing so.
Got a driveway? People are willing to part ways with serious money to rent a driveway permanently, or just use it for a day or two if visiting an area. Always make sure before you undertake one of these ventures that you are complying with the correct procedures and are in a financial position to take on any risk.
If you are looking for more ways to reduce your mortgage in retirement, then talk to a member of our team at Equity Release Warehouse.
Talk to a member of our team for free by calling us on 0330 058 1579 or by visiting our website online at www.equityreleasewarehouse.com.
Reference
[3] https://www.equityreleasecouncil.com/what-is-equity-release/lifetime-mortgage/
