The easy mortgage mistake that means half a million retirees are still paying £600 a month – how to avoid it
HOMEBUYERS are being urged to check they can afford mortgages lasting 35 years or even more, as new data shows half a million retirees are spending a fifth of their income on home loan payments.
First-time buyers are opting for these “ultra-long” mortgage terms to help reduce their monthly payments as interest rates remain high.
Extending your mortgage over a longer term means the amount you have to pay each month is lower than with those lasting 25 or 30 years – but you’ll end up paying more overall.
Around one million households have taken out ultra-long mortgages over the past three years that they’ll be paying into retirement, recent data from the Bank of England shows.
This has concerned experts as forking out for high mortgage payments in retirement would leave them with less to live on in old age.
But, shocking new research has found around half a million retirees are already lumbered with high mortgage bills which are draining their income.
Research by over-50s insurer SunLife, shared exclusively with The Sun, found over 500,000 pensioners are currently forking out an average of £600 in monthly mortgage payments.
SunLife’s research found around 13% of homeowners were retired but hadn’t paid off their mortgages yet – equivalent to around one in 14 (7%) retirees, or 500,000 people.
These retired mortgage holders typically still owe £33,627, which on a five-year fixed term mortgage at a rate of 5.25% works out at £638 a month, or around £7,656 a year.
Yet, it found the average retired homeowner has a household income of £29,514 a year, meaning almost a fifth of their income is being spent on mortgage payments.
The figures spark fresh concern for buyers who have recently locked themselves into long-term mortgages and could be landed with unaffordable bills in retirement.
Mark Screeton, chief executive officer at SunLife, said: “According to our research, the average homeowner retiree has a home worth more than £320,000, but a household income of less than £30,000.
“This means that the vast majority are cash poor and property rich.
“And while most own their homes outright, around one 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.”
The rise of ultra-long mortgages
The latest figures from SunLife come after a Freedom of Information (FOI) in May sparked concerns over the number of people taking out mortgages that will extend into retirement.
The FOI, from consultancy LCP to the Bank of England, found that over the last three years, over one million people took out a new mortgage that would run past the state pension age, which is currently 66.
Recent figures from UK Finance also show that, by the end of 2023, almost one in five first-time buyers were taking out loans with terms of over 35 years, compared with fewer than one in 10 just one year before.
There has been a surge in ultra-long mortgages in recent years as first-time buyers look for ways to spread the cost of their home loans over a longer period, and with interest rates soaring to a 16-year high.
The advantage to longer-term mortgages is that your monthly repayments are lowered.
But, one major drawback is that it can see you forking out more overall as you are paying off interest on the mortgage for longer.
Recent calculations by Moneyfacts for The Sun found that if you borrowed £285,000 over 20 years at 5.81%, you would end up paying back £197,570.40 in interest.
But if you borrowed the same amount over 40 years at 5.81%, you’d end up paying back a whopping £449,654.40 in interest.
It also leaves you in danger of having to pay off your mortgage into retirement, which can be a huge burden if you don’t have income from work.
What to do if you’re paying off your mortgage in retirement
However, there is a way to avoid being lumbered with a long mortgage past state pension age.
While you may want to take out a 35 year or more mortgage at first to keep your monthly repayments low, you can change your mortgage term down the line if you can afford to.
For example, if your income increases, you may be able to reduce your term by a few years, meaning you will have less to pay in retirement – and will pay less interest overall.
If you can’t afford to do this, you could consider selling your home and downsizing to a smaller property.
This won’t be an option for everyone, though.
You could also consider equity release, which is available to homeowners aged 55 or over – but speak to a financial adviser first to ensure it’s right for you.
Equity release is where you take money out of your property tax-free, either as a lump sum or over a period of time, known as drawdown.
You can then use the tax-free cash to pay off the remainder of your mortgage.
However, this loan has to be repaid using the proceeds of your home’s sale after you or the last person in the property dies or goes into long-term care.
This can be a benefits of equity release for the homeowner, as you don’t have to make regular monthly repayments.
Depending on what plan you go with, however, you may be allowed to make voluntary payments to lower the amount you eventually have to repay.
But this is also a major drawback, as you will accrue interest on the amount you borrow over time – meaning a much larger sum will be owed at the end.
This will then leave you with less to pass onto any relatives.
Withdrawing equity from your home may also impact your benefit entitlement.
For example, if you have between £6,001 and £16,000 in savings after releasing equity, your Universal Credit entitlement can go down.
If the equity is worth £16,001 or more, you lose all your Universal Credit.
Plus, there are costs and fees associated with taking out equity, including arrangement fees, valuation fees and legal fees.
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
Plus, you can join our Sun Money Chats and Tips Facebook group to share your tips and stories