Mortgage woes for retirees as their cash plans fall short

Published on Friday 30 April 2010 19:56

THE number of people still paying off their mortgage in retirement is on the rise and the problem is set to escalate as more endowment plans mature with huge shortfalls.

Mortgage debt accounted for more than a quarter of the amount owed by pensioners who took out an equity release plan last year, according to new figures from Key Retirement Solutions (KRS), with the average debt now 35,991. About 12 per cent of people aged 65 to 74 still have a mortgage, figures from insurer Aviva suggest, and as that proportion grows, many pensioners are being forced into financial hardship by onerous repayments.

Dean Mirfin, group director at KRS, said: "Property wealth has enabled the over-65s – in common with the rest of the population – to comfortably afford to borrow. Servicing debt cannot continue to be a way of life once you no longer have an income to enable you to make repayments and, clearly, many pensioners will struggle to juggle loans, credit cards, overdrafts and mortgages."

Consequently, insolvency and advice helplines have reported that growing numbers of over-60s are seeking help with mortgage and unsecured debts they are struggling to control.

The predicament for pensioners still paying down mortgages has been aggravated by the slump in savings income since interest rates bottomed out last year, while retirees have also been hit by lower annuity rates and pension fund losses.

But the failure of mortgage endowment plans is perhaps the single biggest factor forcing many pensioners to review their retirement plans. Endowment mortgages were particularly popular in the late Eighties and early Nineties, when millions took out interest-only mortgages alongside endowment plans that were designed to pay off the actual loan. But endowment values have slumped over the past decade and the vast majority of plans maturing in the coming years are set to fall short of their target.

Carl Melvin, chartered financial planner at Affluent Financial Planning in Paisley, said endowment problems had arisen partly because some salesmen extended endowment terms beyond their client's planned retirement date in order to maximise their commission.

"This is not so good for the pensioner who has to service a mortgage from a reduced income because the policy term overhangs the retirement age by a few years," said Melvin.

Endowment mis-selling complaints, particularly where risks were not properly explained, have been rife in recent years as more people have learned that their policies are likely to fall short. That has been exacerbated by poor investment performance, with the Association of British Insurers estimating that some nine in ten mortgage endowment borrowers will be unable to pay off their loan by the end of the 25-year term. So what can the many retirees with mortgages to pay off do to reduce their loan burden? Here are a few possibilities.

1 PROPERTY

The single biggest asset that most pensioners own is their property, making it an obvious source of funds if mortgage repayments are a problem. The equity tied up in the property can be realised by selling the house and either downsizing or renting, or by taking out an equity release loan. The latter can be used to release a portion of the property's value, some or all of which would be used to pay off the existing borrowing. This would mean there are no monthly payments, as the interest simply rolls up on to the debt, which can be repaid from the sale of the property on death.

This has grown in popularity as more people have taken mortgages into retirement, while opportunities to downsize have been restricted over the past two years as mortgage market activity has slowed.

Alternatively, children sometimes help repay their parents' residual mortgage and avoid the alternatives of equity release or parents having to find monthly payments in their retirement.

2 NEGOTIATE A NEW LOAN DEAL

If those options are unrealistic, it may be worth trying to reach a mortgage arrangement with your lender. Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee, pointed out that some lenders allow customers to take on a retirement home loan, an interest-only arrangement where the capital sum is repaid on death.

"Alternatively, a capital and interest loan could be set up to repay the outstanding balance over a reasonable period, perhaps by age 75," said Lothian.

3 CASH IN INVESTMENTS

Retirees with investment gains that can be realised or investment income to call on could use it to pay off or reduce loans.

Many people are reluctant to fall back on hard-earned savings to clear their debts, but with few deposit accounts keeping pace with inflation, the cash can be more effectively used to pay down interest-gathering debts.

4 TAX-FREE CASH

Up to 25 per cent of your pension fund can be taken out tax-free from the age of 55 and borrowers yet to do this could use the cash to pay down their mortgage.

The cash taken out can be replaced with further contributions from the money saved on mortgage repayments. This is also tax-efficient, given the mortgage is being paid off with after-tax funds and the pension cash is then replaced with pre-tax funds. As always, it's important to take financial advice.