More homeowners are now choosing to lengthen their mortgage terms to reduce their monthly payments, but this can have crippling effects on their retirement.
More than half a million retirees across the country have still not paid off their mortgages, according to new research.
Over 500,000 older people may still be burdened with paying monthly mortgage payments of around £635 when they reach retirement age – which is currently 66, according to research from SunLife.
Those on low incomes could see the majority of their monthly income going straight on housing costs which could affect their general quality of life in retirement.
The insurance company estimates that of all retirees, one in 14 – the equivalent of just over 500,000 older people – may still be burdened with paying monthly mortgage payments.
On average, these retired mortgage holders still owe £33,627, which, over a remaining five-year term at a rate of five per cent on a repayment mortgage, would mean a monthly payment of £635.
With around 1.2 million people not on track for even a minimum retirement lifestyle, Britons are warned about the potential retirement crisis to come.
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Karen Noye, mortgage expert at Quilter said: “Longer term mortgages can have significant implications for retirement plans, particularly for individuals in the UK who are nearing the end of their working lives. One of the primary concerns is that extended mortgage terms can reduce the amount of disposable income available for retirement.
“In fact, Quilter’s own analysis of the PLSA retirement standards data found that for a single person to achieve a comfortable lifestyle in retirement they must have a pension of pot of £738,000, which assumes that there are no housing costs left to pay.
“When retirees must continue making substantial monthly payments, their ability to save and invest for retirement is diminished, potentially leading to a less secure financial future.
“Moreover, the financial stress associated with meeting mortgage payments during retirement can be considerable. Retirees often rely on fixed incomes from pensions, which may not increase in line with inflation.
“This can lead to a tighter budget and increased anxiety about managing finances. The necessity of dedicating a significant portion of income to mortgage repayments can limit the funds available for travel, hobbies, healthcare, and other lifestyle expenses, thus impacting the overall quality of life in retirement.”
By lengthening the term of a mortgage, a borrower spreads their repayments over a longer period of time and therefore reduces the monthly costs.
However, this could mean the borrower ends up paying interest for a longer period of time, and therefore paying more in the long run.
As mortgage terms usually move up in brackets of five years, choosing a longer term can cost a substantial amount more.
For example, someone with a £200,000 mortgage paying five per cent interest over 20 years would face monthly repayments of £1,320, paying a total of £316,876 over the lifespan of the mortgage.
John Fraser-Tucker, head of mortgages at Mojo Mortgages explained his concern about the long-term implications of longer mortgage terms.
He said: “While longer mortgage terms can provide some short-term relief in the form of lower mortgage payments, they come at the cost of significantly higher overall interest charges over the life of the loan.
“By paying more overall, mortgage borrowers may be forced to use their hard-earned pension funds to pay off their outstanding mortgage balance in retirement.
“If they were relying on just the state pension or a small private pot, this could cause financial strain, undermine someone’s financial security in their golden years and increase their risk of poverty in old age.”