Retirees still repaying mortgages
“Any homeowner that does have a remaining mortgage will have to pay this off with the equity they release, and then can do whatever they want with the rest.
Hundreds of thousands of homeowners who have retired have yet to pay off their mortgages and may be facing a sharp jump in costs when their current deals end.
Around half a million retirees in the UK have still not paid off their mortgages, according to research from SunLife, owing on average £33,627.
Mark Screeton, chief executive at SunLife, said: “This means that the vast majority are cash poor and property rich. And while most own their homes outright, around 1 in 14 still have a mortgage. So, for those people, a chunk of that relatively modest income is still being spent on housing, rather than on making the most of life in retirement.”
Many of these homeowners may see their monthly costs increase in coming months if they need to remortgage. For example, someone with a £35,000 mortgage with five years left to run currently on a rate of 2.5% would currently be paying £621 a month. If they remortgaged to a fixed rate deal at 5%, their payments would jump up to £660 a month, an increase of £39 a month or £468 a year.
Older homeowners who are worried about covering mortgage costs may be considering using equity release to help them repay what they owe. This involves taking money out of your home without having to move. There are no monthly payment to make and the capital and interest own is usually repaid when you die or move into long term care and the property is sold.
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Mr Screeton said: “Any homeowner that does have a remaining mortgage will have to pay this off with the equity they release, and then can do whatever they want with the rest.
“So, let’s say a retiree has a home worth £327,020 and an outstanding mortgage of £33,627. If they were able to release 30% of their home’s value, that would be just over £98,000. Once they use this money to pay off their remaining mortgage, they’re left with more than £64,000 to do whatever they want with,”
However, if you’re considering using equity release to pay off your mortgage, it’s important to consider the downsides and you must seek professional financial advice on whether it’s the right option for you. For example, unlocking some of your property wealth could affect your entitlement to means-tested benefits and it will also reduce the value of any inheritance you might have planned to leave loved ones.
One of the biggest issues with equity release is that interest rolls up over time and is compounded. This essentially means that interest is charged on the interest that’s already been added, which means borrowing costs rise quickly.
If you want to keep these costs down, then you can make voluntary repayments if you want to. Repaying just £100 a month could help the typical customer reduce their total borrowing costs almost £17,000 over a decade and almost £50,000 over 20 years, according to the Equity Release Council, the trade body for the equity release sector.
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Alternatively, making a one-off repayment of £700 ever year would save almost £10,000 over 10 years and nearly £30,000 over 20 years.
Jim Boyd, CEO of the Equity Release Council, said: “Small repayment habits add up to significant savings over time. Voluntary repayments make it possible for customers to access property wealth in the here-and-now while increasing the chances of preserving something to leave behind as a traditional inheritance.”