Managing Mortgages In Retirement
Lindsay VanSomeren is a credit card, banking, and credit expert whose articles provide readers with in-depth research and actionable takeaways that can help consumers make sound decisions about financial products. Her work has appeared on prominent financial sites such as Forbes Advisor and Northwestern Mutual.
Paying off your mortgage before you retire is ideal, but it isnt always possible. In fact, many seniors choose to retire with a mortgage. In 2016, 46% of homeowners aged 65-79 had mortgage debt, with a median balance of $77,000, according to a Harvard University study.
Retiring with a mortgage can make managing your finances more difficult, but it doesnt have to be an outsize burden if you know what factors to consider.
What Are Your Other Alternatives
Of course, when you’re deciding whether to retire with a mortgage, you also have to consider your other options.
Obviously, continuing to work until your loan is paid could be one solution, but it’s not always possible if no jobs are available or if you have health issues — or if you are simply ready to be done with your job. You could also think about downsizing to a home you can own mortgage-free, but this can mean a major lifestyle change.
You’ll have to consider these alternatives, and weigh the pros and cons of retiring with a mortgage versus your other options, to decide what approach is best for you.
What Types Of Mortgages Can Older Borrowers Get
As long as you meet the lenders eligibility requirements, you should be able to get a traditional repayment mortgage. This could be a fixed-rate mortgage or a variable-rate mortgage such as a tracker. You borrow a set amount of money and have to pay it back over a pre-agreed term with interest. This could be a new mortgage because youve moved house or bought your first home, or it could be a remortgage to get a better deal. As described above, if youre under 60, you should be able to access the same rates and deals that a younger borrower can.
However, there are also special kinds of mortgages that are designed specifically for older borrowers.
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Get A Mortgage After Retirement
Can you get a mortgage if youre retired, even though you no longer receive a regular paycheck?
The good news: Yes, you can.
Though, qualifying for a mortgage with retirement income comes with specific requirements. Similar to getting a mortgage before retirement, youll need to have reliable income now and the foreseeable future that shows you can repay the mortgage, you must have good credit, and have little debt.
Pay Off Lumps Here And There
Another way to pay off the mortgage quickly is to add in extra lumps of money when you get them.
Not all mortgages allow you to overpay like this, but most will let you pay off up to 10% extra of the outstanding debt each year. If you have a variable rate mortgage, and certainly if you have an offset mortgage you should be able to pay off as much as you like each year.
If you do it this way, rather than reducing the term of your mortgage, then you have to be extra disciplined and make sure that any spare cash you have goes straight into the mortgage rather than being spent on fun things!
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Unlock Home Cash Equity
Equity release loans, also known as lifetime mortgages, can be used to repay any outstanding mortgage debt, pay for home improvements or to help loved ones onto the property ladder, for example.
The loan does not have to be repaid until the last borrower dies or moves into long-term care. You must be over 55 to apply.
Instead of remortgaging from one deal to another, you are given a fixed interest rate for life that is based on how much equity you have in your home and your age.
Option: Equity release loans, also known as lifetime mortgages, can be used to repay any outstanding mortgage debt
There are no repayments: instead, the interest builds up and is added to the loan. Borrowers taking out equity release now can secure record low interest rates. The average fixed rate for life is now 4.14 per cent, according to Moneyfacts, but some rates are as low as 2.8 per cent.
Stuart Powell, managing director of broker Ocean Equity Release, says: Its a borrowers market right now. Legal and General, Canada Life and More2Life are competing for the generation of property owners aged 55 and over, which means lenders are offering lower rates and more flexible features than ever before.
Modern equity release mortgages have features such as optional interest payments and the choice to repay the loan penalty-free if a joint borrower dies.
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You Could Borrow Up To 120000
Of course, this is just a rough estimate of how much you could borrow.
The exact amount we’ll lend you will be subject to a credit reference check, confirmation of your income and the value and suitability of your property.
You’ll need to speak to a financial adviser, who can talk to you about your circumstances.
The next step is to find out the exact amount we could lend you. Just give us a call or ask for a call back.
Its always important to think carefully before securing a loan against your home. As a last resort, your home may be repossessed if you dont keep up with your payments.
Keep Tabs On Your Budget
“Understanding your monthly expenses, inclusive of a mortgage, is vital in retirement,” said Downing. “You need to ensure that you can safely spend from your savings and income in retirement at a safe rate.”
She suggests using the following trick: Create a retirement budget for at least the next 1-2 years. List all of your expenses, including any hobbies you’ll be picking up like traveling or gardening, as well as your mortgage payment. Tally up all of your income, including any fixed payments like Social Security or pensions. For your retirement savings, the general rule of thumb is to estimate withdrawing 4% per year sustainably, depending on the amount you have saved.
Compare your income with your expenses: Do you have anything left over? Or is your budget pretty tight? The more wiggle room you have, the less stressful it’ll likely be to retire with a mortgage.
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When A Payoff Isn’t Possible Minimize The Mortgage
For many in retirement, paying off the house simply isnt possible.
The best case wishful thinking scenario is that they’ll have a cash windfall via an inheritance or the like that can be used to pay off the debt, says CFP Rebecca L. Kennedy of Denver.
In pricey Los Angeles, CFP David Rae suggests mortgage-burdened clients refinance before they retire to lower their payments.
Refinancing can spread your remaining mortgage balance out over 30 years, greatly reducing the portion of your budget it eats up, says Rae, whose office is in West Hollywood.
Those who have substantial equity built up in their homes could consider a reverse mortgage, planners say. These loans can be used to pay off the existing mortgage, but no payments are required and the reverse mortgage doesnt have to be paid off until the owner sells, moves out or dies.
Another solution: downsize to eliminate or at least reduce mortgage debt. CFP Kristin C. Sullivan, also of Denver, encourages her clients to consider this option.
Don’t fool yourself that your grown kids will be back visiting all the time, Sullivan says. Certainly don’t keep enough space and comfort for them to move back in with you!
This article was written by NerdWallet and was originally published by The Associated Press.
About the author: Liz Weston is a columnist at NerdWallet. She is a certified financial planner and author of five money books, including “Your Credit Score.” Read more
How Will I Repay A Retirement Interest
There are two parts to paying off a retirement interest-only mortgage. The interest and the outstanding capital.
During the term of the mortgage, youll make monthly payments to cover the cost of the interest on your loan.
The outstanding capital you still owe will be paid off when the house is sold, you die, or when you move into long-term care.
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Should You Carry A Mortgage Into Retirement
As the Baby Boomers reach retirement age, one of the most important financial decisions is whether or not to pay off a home mortgageassuming theres a large enough nest egg to do so. Is it better to own your home free and clear with no monthly payments? Or are you better off using your accumulated savings for another purpose, such as having a financial cushion or investing in a high-return asset?
For most households, it makes better sense to pay off the mortgage, says Anthony Webb, research economist, Boston College Center for Retirement Research in Boston. Its one step toward reducing your financial risks.
The latest data from the Census Bureaus American Housing Survey indicates that two thirds of 65-and-older households who owned a home in 2009 had paid off the mortgage. That leaves about 6.4 million Americans who are still making payments.
Since income usually drops during retirement, its a smart strategy to cut monthly expenses as well, according to Webb. For most households, that means making bigger payments on the mortgage and other loans before retirementeither in one lump sum or as a gradual process over timeto reduce those debts.
An ideal strategy is to ratchet up your mortgage payments, so the loan can be cleared by retirement age, says Webb. In many cases, you can cut your monthly spending so you dont have to tap your other assets.
Keeping the Mortgage
Factors to Consider
Richard Westlund is a business and financial writer based in Miami.
You Can’t Eat Your Home
The basic concept behind taking out a home equity loan is “you can’t eat your home. Because your residence produces no income, home equity is useless unless you borrow against it. Historically, in the long term, homes provide rates of return below those of properly diversified investment portfolios. Because home equity typically makes up a substantial portion of a retiree’s net worth, it can arguably serve as a drag on income, net worth growth, and overall quality of life in retirement.
Carrying a mortgage during retirement can be troublesome if investment returns are variable, leading to problems paying a mortgage or uneasiness related to carrying a large amount of debt during a market downturn.
So, logically, the next move would be to shift your assets from your home by taking out a mortgage and investing the money in securities that should outperform the after-tax cost of the mortgage, thereby enhancing the net worth in the long run and your cash flow in the short run. Additionally, investments such as most mutual funds and exchange-traded funds are easily liquidated and can be sold piecemeal to meet extra spending needs.
This all sounds great, but it’s not that simple: Any time you introduce more leverage into your finances, there are a lot of things you need to consider. So, what are the benefits and drawbacks of this strategy?
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Can I Apply For A Mortgage In Retirement
Home-buying trends and the challenges that retirees face when purchasing a home can change, adapting to shifting retirement ages. If youâre retired or close to retirement, you may be thinking about buying a home for one of a number of reasons, including remortgaging, moving elsewhere, buying to let, downsizing your home or helping out your children or grandchildren to buy a property of their own.
Anyone applying for a mortgage is typically assessed to see if theyâre able to afford the loan repayments and to repay them on time. Among the criteria that lenders typically look at when assessing a mortgage application is your income. Just because youâve retired and no longer have a steady stream of income doesnât mean that youâre automatically disqualified. Some lenders are willing to accept applications from applicants over the age of 65, according to this article from August 2016. Itâs likely that youâll still have to prove that youâll receive funds regularly, such as from your pension.
If youâre thinking about applying for a mortgage in retirement, you may want to consider speaking to your family and friends first, as they may have useful ideas of suggestions to help with your purchase or living situation. You may also want to consult with an independent financial adviser to see if your getting a mortgage may impact your finances in other ways, for example, when it comes to taxes, benefits or investments.
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Reasons Not To Pay Off A Mortgage Before Retirement
by Maurie Backman | Updated July 19, 2021 – First published on Feb. 11, 2021
Many seniors aim to kick off retirement without housing debt, but here’s why you may want to go a different route.
Many people buy homes in their 20s, 30s, and 40s and have their mortgages paid off well ahead of retirement. But if you bought a home later in life — say, in your 40s or 50s — paying your mortgage off ahead of retirement could mean having to sink extra money into that loan on top of your monthly payments. And while that’s a route you may choose to take, here are a few reasons why it could make sense not to pay off your mortgage before your career comes to an end.
You Have Little Savings
Borrowing money to pay for a home is an affordable option. After all, that’s what mortgages are for. That isn’t the case with borrowing money to live on. You’re going to need retirement savings once you’re no longer working to supplement your Social Security benefits. If you’re behind on those savings, then it pays to first work on boosting your IRA balance before you even think about paying off your home loan early. If you retire with inadequate savings, you could wind up struggling immensely as a senior.
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Will Selling My House Help Me Retire Soonerand More Securely
By Jason Heath on September 18, 2019
Karen divorced at 55 and worries about carrying mortgage debt when she retires. At the same time, she thinks rent may cost more than she pays now. A comparison of the two scenarios will help her decide.
Q. I divorced five years ago at age 55 and am now trying to decide when to retire. Id like it to be sooner rather than later, but I need to determine whether I should continue paying a $300,000 mortgage into retirement, or sell my townhouse and pay out monthly rent that exceeds my current combined monthly mortgage and property tax payment. Are there any guidelines for making this decision?Karen
A. Everyone knows that you should try to avoid going into retirement with debt. Its a good goal, but sometimes, life throws you a curveball. Things like disability or death can be insured against, but a third ddivorcecan make it tough to recalibrate in the late stages of your career.
Sometimes, monthly rent can exceed the mortgage payment on a similar home. But thats not the best way to decide whether renting would be better than continuing to own or not.
An owner does get the benefit of some of their mortgage payment going towards principal repayment, reducing their mortgage balance. Their home is also hopefully appreciating in value as they own it.
Im hesitant to use rules of thumb with financial decisions. You should consider all the factors, Karen.