One in four people planning to retire this year will still have a mortgage or other debts to pay off, according to the Prudential insurance company’s annual research into the financial aims of people planning to retire.
This up by around 5% compared to last year, when 20% of those retiring were in debt.
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“Class of 2017″ has average debts of £24,300
The research found that 2017’s indebted retirees owed an average amount of £24,300 – this is up from £18,800 in 2016.
Also, mortgages have become a bigger source of debt, with 38% of those expecting to retire in debt owing money on property. But, around half of those retiring debt also have (albeit smaller) outstanding credit card balances.
How long does it take to get out of debt in retirement?
Those retiring in 2017 with debts say they need an average of 3-4 years to pay off, with average repayments put at around £230 a month.
But, just over 16% expected to take seven years or more to pay off their debts, and around 7% were concerned they would never get out of debt.
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Caught out by interest only mortgages
Worryingly, a report by the Financial Conduct Authority (FCA) found that 2017/18 would be the first of three “peak periods” when large numbers of interest-only mortgages would mature.
With an interest-only mortgage, you only pay off the interest on the amount you borrow. This gives you a lower repayment, but the mortgage debt does not shrink over the term as it would with a “normal” repayment mortgage.
Whilst these mortgages are rarer now (and mostly just found with Buy-to-Let deals), they were more prevalent in the 80s and 90s, which means many interest-only mortgage terms are due to end.
This shouldn’t be a problem if these were correctly sold, meaning borrowers were made aware of the risks and advised to have “repayment vehicles” (investments and savings that will sufficiently grow over the mortgage term to be large enough to repay the debt).
But, the FCA is concerned that almost half of borrowers with interest-only mortgages (1.3m homeowners) might not have sufficient funds to repay their debts. They have been encouraging those with an interest only mortgage to “act now” since 2013.
Remortgaging when you’re older
Once you’re over 50 your mortgage options begin to change, so it’s worth planning whether or not you should remortgage well in advance of retirement.
Most mortgage lenders have an upper age limit for their lending, typically one for taking out new mortgages (normally 65 to 70) and another for paying them off (between 70 and 85).