Caution – Mortgages that extend into retirementPosted on: 26 October 2012 by Minesh Patel
Minesh Patel looks at the dangerous legacy of interest only mortgages that could burden you into retirement.
A concerning development is the number of homeowners approaching their retirement age who have interest only mortgages and have not made any provision to repay the original capital. The concept of an interest only mortgage is that you repay only interest to the mortgage lender but at the same time you save regularly into an investment such as a stocks or shares Individual Savings Account (ISA) or in the 1980s and 1990s and endowment.
To my surprise I have come across a number of homeowners recently where there is no repayment method for the original capital borrowed with the homeowner instead relying on the mortgage lender to extend the mortgage term or re-mortgaging to another lender. This is a very dangerous practice where you are reaching or have reached your retirement age. Most mortgage lenders will want the mortgage repaid by the latest of your 75th birthday and if you have reached state pension to show how you will continue paying the mortgage into retirement. They will seek evidence that you have pensions to support mortgage payments and to offer an explanation with the intention to continue working will insufficient.
Another cautionary point is that mortgage lenders will be reluctant to offer interest only terms unless you definitely can demonstrate that you have some investment vehicle to repay the mortgage. I would urge anyone with an interest only mortgage which will extend into retirement to start planning at least 10 years before their mortgage term expires. However what should you do if you are only a few years from the date your mortgage should be repaid and you still owe money to the mortgage lender?
- If you have equity in your home consider downsizing, a smaller home either flat or house will have lower running costs which will release income for hobbies and activities you enjoy doing.
- Begin discussions with your current mortgage lender on extending the mortgage term but present a case on how the mortgage will be repaid at the end of the extended mortgage term. Will you have sold your property anyway?
- I recently spoke to the Harpenden Building Society for a couple in the mid-70s who wanted to extend their mortgage term. They were willing to consider the application but only a repayment basis. Smaller building societies and banks may be more flexible but specialist knowledge from a mortgage broker is required.
- If you have other investment properties use the equity in them to repay your residential mortgage rather than extending the mortgage into retirement.
- If you have any form of bad credit getting a new mortgage lender to consider you when you have reached retirement will be very difficult so my suggestion would be to sell and downsize.
There is no question that mortgage lenders have considerably tightened their criteria since the financial crisis in 2008 and obtaining mortgages is more difficult. You should always aim to present your needs in a way which appeals to the mortgage lender. They want to grant mortgages to people who will repay the money they owe.
Have you purchased a interest only mortgage? Are you confident of your payment strategy? Share your concerns below or email me on email@example.com.
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