As the average age of a first-time buyer increases, it’s inevitable that many will be paying off their mortgage later in life too. As a result, the number of people that still have a mortgage in retirement is expected to rise.
As house prices have climbed, but wages have remained relatively static, young aspiring homeowners have found it increasingly difficult to get on the property ladder. With many mortgages requiring a minimum 5% deposit, in some cases 10%, it’s not surprising that the typical age of a first-time buyer has increased. Over the last twenty years, it’s gone from 26 to 34, according to the Office of National Statistics.
While first-time buyers may have little choice to buy earlier, they do need to consider the consequences of doing so. This includes potentially paying a mortgage past the point they’d hoped to give up work. Taking a mortgage past retirement age can mean plans need to be adjusted.
Alistair McQueen, Head of Savings and Retirement at Aviva, said: “The rise in age has significant implications for our retirement planning. We assume that our mortgage will be paid off by the time we retire – allowing us to maintain our living standards on less income. As the average age of home ownership rises, this will no longer be the case for a growing number of people.”
The good news is that there are mortgages suitable for those buying late in life, allowing for more affordable monthly repayments. In the past, banks and other lenders often wouldn’t lend beyond traditional retirement age. For those buying in their thirties or older, this could mean facing higher bills each month. However, many lenders, including those on the high street, offer mortgages that extend beyond retirement, in some cases allowing terms until you turn 85.
This can be a great help to homeowners looking to reduce costs in the short term. However, it’s just as important to look further ahead too. If you’re looking forward to a retirement that has fewer financial commitments, paying a mortgage at 85 could seriously hamper your plans.
What to consider when taking out a mortgage
With the above in mind, it’s important to think about the future when taking out a mortgage too. Of course, interest rates and monthly repayments will play a crucial role in your decisions, but so should the long term.
Length of term
In the past, it was common to take out a mortgage that lasted for 25 years. However, this has slowly been creeping up. Driven by high property prices and the need to ensure repayments remain affordable, it’s now common to see mortgages with lengths of 40 years. If you take out your first mortgage in your mid-thirties, you may still be paying after retirement.
It can be tempting to take out the longest mortgage available, reducing how much you’ll pay each month. However, there are two important factors to consider here. The first is whether the end date aligns with other lifestyle plans you may have. The second is the interest you’ll pay over the length of your mortgage, extending your mortgage term by a decade could mean paying out thousands of pounds more in interest.
Possibility of overpaying
One option for reducing your mortgage without committing to higher monthly repayments is overpaying where possible. This gives you more flexibility, deciding how much and when you want to pay more. For example, following a pay rise, you may decide to optionally pay more each month or take a lump sum off your mortgage when you’re in a position to do so.
When you overpay, the capital will usually come directly off the money you owe, meaning it won’t be lost on paying off interest. This allows you to reduce your mortgage quicker and save money. Often, it’s possible to overpay 10% of the outstanding balance each year without incurring extra charges from your lender. However, you should clarify this before you take out a mortgage as it could prove costly if additional fees were applied.
Remortgaging in the future
While a mortgage is for the long term, you aren’t committed to the mortgage lender for the full term. This means you’ll have an opportunity to remortgage and secure a better deal.
It’s impossible to know what the future holds, but having a rough plan for paying your mortgage in five or ten years’ time can be useful. For instance, as we get older, our salary typically increases, freeing up more income to go towards paying off a mortgage should you choose. So, while initially, it may be necessary to take out a mortgage term that would take you into retirement, you can cut it down at a later date when you’re able to comfortably handle higher monthly outgoings.
Searching for a mortgage can seem complex, as there are many different areas to consider. When you need to factor in your ability to potentially pay past retirement, it can seem even more daunting. We’re here to help you find a mortgage that suits your needs, both now and in the future, whether you’re a first-time buyer or looking to remortgage.