Interactive Investor

Mortgages that last into retirement put pressure on pensions

20th September 2021 12:32

Rebecca O'Connor from interactive investor

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interactive investor comments on UK Finance research.

UK Finance, the trade industry body, has issued research suggesting that more than half of mortgages are being taken out by borrowers not expecting to pay them off by their 65th birthday.

Becky O’Connor, Head of Pensions and Savings, interactive investor, the DIY pension platform, said: “Not only is the dream of retirement under threat but also the dream of mortgage freedom. The two go hand in hand – having enough pension income to retire well is usually dependent on having paid off the mortgage, leaving your pension pot free to cover other living costs when you give up work. 

“The trend of mortgages that last into retirement means people need to invest even more into their pensions if they still want to be able to give up work and continue to meet housing costs.

“The level of state pension, as well as estimates for what people need in retirement to meet certain living standards, are usually based on the assumption that people have paid off their mortgage. So there is a risk that if someone does want to give up work but still has a mortgage to pay, they won’t have enough in their pension.

“The UK Finance research illustrates how rising house prices feed into the pressure to continue to work into old age. Longer-term mortgages improve affordability today, but defer the pain of repayment until tomorrow, when many may feel less able to work to meet the costs.

“The risk is that when you reach your 60s, you may be unable to work to earn enough to meet your mortgage payments. It’s a risk that’s hard to appreciate when you are 40 and taking out a 30-year mortgage. But it’s wise to plan as though you will still retire, rather than assume that you will be able to continue to work.

“Based on a fixed monthly mortgage payment of £700, someone with a mortgage term that ends at 70 rather than 65, who retires at 67, would need an additional £25,200 in their pension pot on retirement to continue to fund their mortgage.”

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