7.6m of us consider our homes to be our pension, but will we have paid off our mortgages by retirement?
According to some recent research by Lincoln Financial Group, more than 7.6million of us are banking on our homes to help fund our retirement, ahead of any other long-term savings. But the question is - when will we have paid off our mortgages?
Lincoln's research indicates that the average age homeowners can expect to be mortgage free is 56½. Some of us will have got rid of that debt a lot sooner, with nearly half a million of us paying off our mortgages by 45. However, a whopping 1.6 million of us do not expect to clear our mortgage debt until 65, and 309,000 will still be making payments when we are blowing out the candles on our 70th birthdays!
So why are we killing off this debt so late in life - the standard term we typically sign up for when we purchase a house is 25 years? Well, for a start, high property prices have meant that a large number of us can only afford to buy later in life. Additionally, relatively few of us stay in the same house for the full 25 years and as we tend to move to more expensive properties, our mortgages increase, rather than decrease. To counter any rise in payments we can choose to increase our mortgage term - and so it's not surprising a number of us can find ourselves still saddled with large mortgage debts in our sixties!
Clearly having to make mortgage payments so late in life is not ideal - especially if we're surviving on a pension! What's more, with 7.6 million of us expecting to use our homes to help fund our retirement, shouldn't we have cleared that debt much earlier?
Spread your risk.
All Fools know that you shouldn't put all of your eggs into one basket. If you'd been seriously planning to only rely on your home for your retirement income, you should start re-assessing your situation now. While property prices have increased enormously in recent years, our homes should still just account for part of our retirement planning, with a healthy dollop of savings, pensions and investments making up the mix. Make the most of the tax-free savings vehicles available, the simplest being mini and maxi ISAs and if your company contributes money to your pension you should snap it up - that's free cash! By spreading your money around you effectively reduce your risk, which becomes ever more important the closer you are to retirement.
Overpay
But going back to mortgages, if you do have some extra cash kicking about at the end of each month after savings and investments, why not use it to overpay your home loan? Most flexible mortgages have an overpayment facility, typically allowing borrowers to pay off an extra 10% of their loan each year. Not only could this save you a fortune in interest, it can shorten the length of your mortgage, too.
An extra £50 paid each month into a £100,000 mortgage with a 25-year term at 6% APR could save you over £16,000 and mean you'd have paid it off almost four years earlier. Overpaying by £100 could save you over £27,000, and mean you'd own your home in just over 18½ years! Check the details of your mortgage and, as long as there are no penalties for doing so, consider overpaying. You could also look into changing to an offset/current account mortgage when the time comes to switch.
If the prospect of making mortgage payments in your sixties doesn't appeal, consider overpaying to reduce that mortgage debt, now. But don't forget that your home is just one part of your portfolio and spread your risk by stashing some cash in savings, pensions and investments, too.