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The truth about retiring with a mortgage

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For many people approaching retirement, one of their main goals is to live a debt-free life. A mortgage is the most substantial monthly debt you will incur during your lifetime, and many of us dream of eliminating that final payment long before we retire.

Yet, more and more people are taking their mortgages into retirement with them, partly because the average age of first-time home owners is increasing and some customers are taking out loans much later in life. Unlike the taboo it used to be in previous years, it may actually be more financially beneficial to keep your mortgage instead of slaving away to get it paid off in time.

Paying off your mortgage before you retire may be a good option for you if you have enough savings to last you throughout your retirement. But, if you really want to remove this chain from around your neck, you could cash in pension funds early in order to free up some cash. Of course, this is just one possible option that over 55s might wish to consider, and it’s important to weigh up the pros and cons before you make a decision.

A big decision not to be rushed

As you approach retirement, you’ll find yourself constantly assessing peaks and troughs in the national base rate.

If the growth potential of your retirement savings is low compared to the interest rate on your mortgage, paying off your mortgage quickly may be a good idea. However, if you feel your retirement savings offer better growth potential than your mortgage interest rate, you may be better off keeping the mortgage.

If settling your mortgage outright is going to leave your retirement piggy bank empty, you need to hang fire. But, those who have built up a substantial nest egg could manage to buy their home by using a 25% lump sum of their pension pot, still leaving them with a healthy retirement fund.

5 Things to consider…

• The mortgage lender will need evidence that you can afford to keep making the payments out of your new “retirement income”. It is important that you are certain you can afford the payments, as your income will most likely be lower than it was while you were at work.

• If you are wanting to sell your house in the next few years, chances are you’ll pay off the mortgage then anyway. Keep the mortgage now for added financial flexibility.

• If you expect to tap into your home equity for living expenses, you might want to keep the mortgage. It’s cheaper than paying off your housing debt and then taking out a home equity loan or a reverse mortgage.

• Paying off your mortgage leaves you with disposable income that you can freely spend on things that are important to you, or you could even start to build a nice fund for your loved ones.

• If you are struggling to keep up with your mortgage repayments, why not consider downsizing? Sell your house, pay off the mortgage and move into a new smaller home. Some people can find giving up their everyday lives to retirement emotionally challenging. Refreshing your surroundings by moving into a new retirement pad could be the catalyst to beginning the next chapter of your life.

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