When you still have a mortgage, but retirement isn’t far away, what options do you have to help you pay it off?
Life in the UK has been getting more expensive for years, but those costs have skyrocketed again since 2022 making it harder to pay off mortgage debt.
UK food and energy prices rose in reaction to the conflict in Ukraine, and the price of consumer goods and services leapt by 9.6% in the year to October 2022, the fastest in four decades.
The prices of food and alcohol soared by 19.2% to March 2023 and mortgage rates and rental costs have also spiked with millions set to remortgage this year onto higher rates than they had previously been able to secure.
As a result, many have struggled to balance the day-to-day cost of living with managing down debt levels. The spike in mortgage rates since 2022 means borrowers are likely to be paying off that debt at a higher rate for longer on their current loans.
The latest Monetary Policy Committee meeting on the 6 February brought a Bank Base Rate cut of 0.5% to 4.5% after the economists concluded many of the inflationary shocks to the UK economy had ‘receded’.
But despite ongoing inflationary pressure, the markets are already pricing in two further cuts to 4% this year with bigger global banks predicting cuts to as low as 3.25% by year end.
The outlook continues to brighten with two previous cuts to interest rates in August and November 2024 driving average two- and five-year fixed mortgage rates downwards, according to Moneyfacts data.
The average two-year fixed rate in January 2025 was 5.48% compared to 5.93% in January 2024. For the five-year version, the average rate of 5.55% seen in January 2024 fell to 5.25% in mid-January 2025. However, this may not be enough to soften the blow for many.
A November 2024 Bank of England report confirmed half of mortgage borrowers, or 4.4 million, will see higher interest rates when refinancing over the next three years.
Some 31% of these, or 2.7 million borrowers, will refinance onto a rate of more than 3% for the first time, while 5% or around 420,000 people will see their monthly payments increase by more than £500. Just 2.4 million borrowers or 27%, caught out by some of the highest mortgage rates in decades from 2022 to 2023, will see monthly payments fall.
The financial challenges faced by homeowners
Over the low-interest rate years, people got into easy habits of borrowing against the mortgage to pay off debt or using further mortgage advances, again, to refurbish properties as they climbed the property ladder.
As a result, even though house prices rose, many find themselves with large mortgages they haven’t been able to manage down over the years. Equally, those with interest-only mortgages who neglected to set up a repayment vehicle, or have not saved enough into one, may find themselves running to catch up to repay their mortgage before retirement.
That is alongside the rising pension savings gap, which has quadrupled since 2019 to £31,546 fuelled by inflation, according to research from investment platform Hargreaves Lansdown.
The fact is the amount we need for a moderate standard of living has shot up 40% from pre-pandemic levels, making it hard to stretch money to cover the cost-of-living and save for a rainy day.
Are there solutions for over-55s with high mortgage costs?
Overpaying your mortgage as fast as you can has always been best advice in any interest rate environment because the faster you pay off the capital, the less interest you owe over the mortgage term.
If you’re on an interest-only mortgage, advisers may suggest remortgaging to a capital and interest loan and if affordability allows it, shortening the mortgage term to pay higher monthly amounts until the mortgage is paid off.
But if you’re 55 or over, one of the other options to consider is the range of mortgages now available to older borrowers including equity release in the form of lifetime mortgage.
Taking out equity release can almost double available retirement savings, according to Hargreaves Lansdown. Its research suggested homeowners could add an average of £69,600 worth of property wealth into their retirement income, a fifth more than five years ago. This leads to a total retirement pot of £141,600.
Equity release rates have also stabilised, with the average APR for a new lifetime mortgage product reaching a year low of 6.47% in October last year, according to the Equity Release Council.
The number of people taking out lifetime mortgages to solve the retirement, mortgage and cost-of-living financial stretch continues to rise across every region apart from the North East.
Meanwhile, the total number of mortgage completions by people aged at least 56 years old has dropped from 175,260 in 2005 to 84,576 last year, figures from the Council have revealed.
Higher mortgage rates and mortgage lender affordability checks mean gaps are emerging between hope and reality for many. Some may not be able to afford the monthly repayments offered so may be considering staying on the higher Standard Variable Rate (SVR) lenders offer at term end to avoid the affordability check involved with a remortgage, which will be expensive and won’t help manage your budget.
How can a lifetime mortgage help?
The lifetime mortgage market offers consumers another route, with the potential to check affordability providing the option for the customer to pay off some, or all, of the interest each month, managing down the amount of interest roll-up, or without payments, meaning the full interest will roll-up.
Since the two base rate cuts in August and November last year, consumer confidence and a readiness to prepare for the future and make financial decisions has buoyed the outlook for this type of borrowing.
It’s important to use a lender who is a member of the Equity Release Council which offers an important set of additional protections and standards. These mortgages are regulated like any other by the Financial Conduct Authority, but as mentioned, some products roll up the interest over the loan term, so you continue to live in and own your home but are not obliged to make a monthly payment.
In this scenario, there is the option not to make any monthly payments, however, you will retain more of your equity if you choose to undergo an affordability assessment to make a regular or semi-regular monthly repayment.
With some products this can even lower the mortgage rate, decrease the amount of interest owed over time and offer you real flexibility over how you manage your equity release.
In February, more2life which has won over 50 industry awards, launched its Flexi Interest Reward lifetime mortgage. It’s one of a new breed of lifetime mortgages offering the borrower far more control over the overall loan cost. Loan amounts offered start from £15,000 to £1.5m and this loan requires an affordability check over the borrower’s finances.
In exchange, more2life offers lower, personalised interest rates determined by the customer’s willingness to make monthly payments.
If the borrower can make overpayments, this will reduce the cost of borrowing further. If you can pay more than 100% of the plan’s monthly interest, a bigger interest rate discount is typically on offer for doing so. As standard, monthly payments and overpayments combined are allowed up to 10% of the initial loan amount each year during the early repayment charge (ERC) period of 15 years.
Lifetime mortgages are offered to people over the age of 55 years’ old and aged up to around 82. Flexi Interest Reward comes with a maximum LTV of 48% assuming an older borrower will have paid off a proportion of their mortgage loan over time.
But the client can continue to live in their property for life, will never owe more than their home’s value, and will always know their rate, which is fixed for the entirety of the plan, providing they make all payments.
Ask your adviser to assess the whole market and weigh up Flexi Interest Reward against the value of every other lifetime product available to you. If a payment-free loan fits your lifestyle and budget better for now, there are other options. more2life also offers a product called Maxi Zero, which is the only lifetime mortgage with no early repayment charges so you can pay off your loan in the future without any charges if your circumstances change.
You’ll need to appoint a mortgage/later life lending adviser to help you navigate the market and understand if this is right for you. You’ll also need to appoint a solicitor too and best advice is to involve a member of your family as this may impact their inheritance.
But it’s almost certain the value of your property will have risen over time and that the equity you own has risen as the mortgage has been repaid.
It may be time to unlock this value to help you fill the lifestyle gap between hope and reality.
Dave Harris is CEO at later life lender, more2life
