Paying off your mortgage before retirement may not always be the best idea.
People strive throughout their working lives in order to attain their main financial goal – to have their mortgage repaid before they reach retirement age.
Studies on Mortgages
During one’s life, a mortgage will be the greatest financial outgoing each month and consequently is seen as a millstone around one’s neck. Hence, this is the reason to strive and eliminate this debt as soon as possible; the usual goal preferably before retirement.
According to the statistics, there are still approximately 12% of people carrying their interest only mortgage into retirement with a substantial average balance of almost £60,000!
The mentality of the older generations that debt is bad has dwindled and people can now see how an interest only mortgage into retirement can actually assist their pensioner lifestyles. Particularly still in 2013 with the Bank of England base rate at an unprecedented run at the lowest interest rate in history at 0.5%. Yes, retirement savers are suffering as a consequence, but the retirement borrowers are benefitting.
Retirement Mortgage versus Paid in Full
Therefore, having a retirement mortgage may not be so bad. Many people may have selection this option, rather than feel short of cash. Rather than a large mortgage, by keeping some semblance of borrowings into retirement, property owners can also use this mortgage to assist with estate planning and thus enabling mitigation of any potential inheritance tax (IHT) paid by their beneficiaries after they die.
This would involve totalling the assets; which would include the property and its contents, any savings/investments and then deducting the liabilities such as loans, credits cards and bills. If the mortgage is substantial, this will significantly impact on the net value of the estate and reduce any potential inheritance tax that may be due.
Another popular reason for carrying on with a mortgage into retirement could be that the home owner could use the additional capital to increase monthly income and pay for lifestyle improvements. Considering the alternatives and living your longest holiday in constant financial plight, this makes a sensible option. Particularly the case as the beneficiaries may only need to sell the property anyway to pay the potential inheritance bill after you die.
Top Reasons for Taking out Loans
Popular reasons for raising extra funds can be improvements to the home, buying a car, caravan or holiday home to retire and relax with. In today’s environment of first time buyer’s difficulty in obtaining mortgages, then how useful could it be to gift money to children, even grandchildren now and enable them to get on the first rung of the housing ladder.
The usual warnings come with this. Any gifts made from one’s estate when over the inheritance tax threshold should be considered carefully. The seven year rule exists in that you need to survive this period after the date of the gift; otherwise it can still be included as part of the overall value of the estate.
Interest Only or Rollup
There are decisions to be made when looking towards financial products in retirement. The interest only lifetime mortgage definitely offers a good way to save some inheritance. It can also be more comfortable since payments are made and the capital loan amount never changes.
Yet, there are choices like the rollup lifetime mortgage which can be taken in three different ways. A rollup mortgage implies the interest is rolled into the capital sum. It compounds onto the back of the loan, so the capital and interest have to be paid at the end of the mortgage term, which for retirees is the end of your life.
With standard rollup mortgages you take out a lump sum based on the value of your property and your age. A drawdown lifetime mortgage works by giving you an equity account to withdraw from as you please. The more you withdraw the less equity is left in your property. As you withdraw from the account interest is compounded on to the loaned amount. Any funds remaining in the account are not a part of the interest roll up because they are technically not being used.
Lastly if you have ill health then the life impaired or enhanced lifetime mortgage can be used to gain the largest lump sum a company will offer retirees. The premise is that you pay it back a lot earlier than these other mortgages due to your health issues. It is like a roll up mortgage in all other respects.
Therefore, taking an interest only mortgage into retirement has its advantages and disadvantages, however if one has the resources to fund the repayments, then they aren’t such a bad concept after all.