Why you need to consider your retirement plans if you choose a longer mortgage

Data suggests that an increasing number of homeowners could be paying their mortgage past the traditional retirement age. While taking out a longer mortgage can be useful, it’s important to have a long-term plan so you can meet other goals too.

According to research from Quilter, the number of people over 40 taking out a mortgage with a term of 35 years or more has spiked in the last two years. In 2021, the number increased by a huge 433% when compared to 2020. It’s increased by a further 39% in 2022.

A mortgage with a longer term means your monthly repayments will be lower and more manageable. However, it also means the total amount of interest paid will be higher and you should be mindful of how it could affect your retirement plans.

There are many reasons why you may be considering choosing a mortgage with a longer term but soaring house prices are playing a key role in the trend. The average house price is now more than £285,000, according to the Halifax House Price Index data.

Compounding the trend for longer mortgages is that the average age of a first-time buyer is rising. Previous research from Halifax found that the average age someone buys their first home is now 32, and over 30 in every UK region.

As a result, more people are taking out longer mortgages in their 40s or later, whether they’re buying their first home or moving up the property ladder.

Why a longer mortgage term could affect your retirement plans

There are several ways that choosing a longer mortgage could affect your later-life plans.

It means you’re more likely to still have a mortgage when you approach retirement age. Taking out a 35-year mortgage at 40 means you could still be paying it almost a decade after you could claim the State Pension.

A mortgage is a large financial commitment, and it could mean you’re forced to delay your retirement plans or compromise on the lifestyle you want because you need to factor repayments into your budget.

A longer mortgage could also affect your savings, which in turn may affect your financial security later in life. Not only will you need to make repayments for longer, but the total cost of borrowing can be far higher.

Let’s say you borrow £250,000 with a 4% interest rate through a repayment mortgage. With a 25-year term, the total interest you pay would be £145,712, according to the Money Saving Expert mortgage calculator. Choose a 35-year mortgage, and this rises to £214,659. That’s an almost £70,000 difference that could go towards your retirement plans.

So, a longer mortgage term means your repayments will be lower now, but it could affect your future.

While a shorter mortgage could make financial sense, your circumstances may mean it’s not an option. If you could be paying a mortgage as you near retirement, here are three things you could do.

1. Overpay your mortgage

Overpaying your mortgage is a good option if you want to repay the debt quicker, while still having some flexibility. You can choose to make regular overpayments or a one-off lump sum.

As you’ll be in control of the overpayments, you can pause or stop them if you need to.

When you make an overpayment, the money will go towards reducing the amount you owe, rather than paying interest. So, it can be a useful way to reduce your mortgage term and save money overall.

If you have a £250,000 repayment mortgage over 35 years with an interest rate of 4%, your monthly repayment would be £1,106. If you made an overpayment of £150 a month, you’d clear your mortgage seven years and nine months earlier the mortgage calculator shows. You’d also save almost £55,000 in interest.

Before you make overpayments, you should check your mortgage agreement. In most cases, you can pay up to 10% of the outstanding debt before fees are added but reviewing your paperwork could help you avoid unnecessary charges.

2. Review your mortgage when your current deal ends

While you may choose to take out a longer mortgage now, you can change it in the future.

When your current deal ends, it’s a great opportunity to review your costs and budget. Your financial circumstances may have changed. If your income has increased and you can afford higher repayments, you may want to opt for a shorter mortgage when searching for a new deal.

As you make repayments or the value of your property rises, your loan-to-value (LTV) ratio will fall. Typically, the lower your LTV the more competitive the interest rate you’re offered. As a result, choosing a shorter mortgage in the future may not affect your outgoings by as much as you think.

3. Make your mortgage part of your retirement plan

If you could still be paying a mortgage when you retire, planning is important.

It is possible to secure a new mortgage deal later in life, including after you’ve retired if you have sufficient income. Incorporating mortgage repayments into your future budget can help ensure you remain on track for your retirement and can give you confidence in your long-term plans.

Contact us to talk about your mortgage needs

If you’re applying for a mortgage and have questions about your options or want support throughout the application process, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.