Is the dream of having a mortgage-free retirement over?

By Vicky Shaw

June 9 2022, 5:00 pm

Research by pensions and retirement specialist LV= has found some people are entering their retirement with significant amounts still to pay on their mortgage.

Many homeowners look forward to a time when they will no longer be making mortgage payments.

But with soaring house prices, longer mortgage terms and the cost of living crisis to contend with, the dream of being mortgage-free in later life might not be the reality.

Record high

The average price of a home in Scotland now stands at a record £218,992, according to the Walker Fraser Steele Acadata House Price Index (Scotland).

Some people are retiring with significant mortgage debts, according to pensions and retirement specialist LV=.

Of those retirees who still had outstanding mortgage debt, just over half of them used pension money to pay it off.

Survey

The LV= Wealth and Wellbeing Monitor – a survey of around 4,000 people across the UK – found one in eight (12%) retirees still owed money on their mortgage when they retired.

Nearly a fifth (19%) of those owed between £50,000 and £99,000 and more than half (56%) of them used money from their pension to pay off what they owed.

One in 16 (6%) continued to work, 5% used equity release, and 5% downsized.

The research found a third of working-age mortgage holders don’t expect to pay off their mortgage off by their mid-60s.

Longer mortgage terms

Clive Bolton, managing director of protection, savings and retirement at LV=, said: “For millions of people, the dream of a mortgage-free retirement is over.

“The huge rise in house prices – and accompanying longer mortgage terms – mean millions of people will go past their retirement age with large mortgages to pay.”

For the younger generations, hopes of being mortgage-free may be even further out of reach.

Clive Bolton, of LV=, said millions of people will pass retirement age with lots still to pay.

Among those who haven’t reached retirement age, a third (33%) of mortgage holders surveyed for LV= don’t think they will have paid their mortgage off by the time they reach their mid-60s.

Nearly one in 10 (9%) aren’t sure they will ever be mortgage-free.

Options

People aged 55-64 years old, who are approaching retirement, are mulling the options to pay off their debts, the research found.

Around half say they would carry on doing some paid work, and a quarter are considering dipping into their pension.

Downsizing, equity release and potentially renting out a room are other options being weighed up.

People are weighing up their options to make sure they get the retirement they have been dreaming of.

Pensions and equity release

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “Many people think they can dip into their pension to clear any remaining amount, but it is important to make sure that plundering your pot today does not leave you short of money in the future.”

She said equity release could pay off the outstanding mortgage but it could leave you with significantly less to pass on to your loved ones in inheritance.

Helen Morrissey, of Hargreaves Lansdown, pointed out pensions have to last a long time.

Downsizing

Research from Hargreaves Lansdown found one in five people plan to downsize in retirement.

Helen said: “In reality, people find it harder to downsize than they first thought. They have often built up an emotional attachment to the home, where they have brought up a family and they have close networks of family friends that they don’t want to leave.”

Helen suggested that those with savings may want to see if it’s worth making mortgage overpayments while they are still working.