Key Post What are the options for someone approaching retirement who still has a mortgage?

Brendan Burgess

Brendan Burgess

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This has come up in a few different posts recently so here is a general guide.

This thread is dealing with family homes only. Mortgages on investment properties and holiday homes can generally be cleared by selling the property.

Most people probably clear their mortgages in their 40s or 50s but there are considerable numbers left with a balance on their mortgage.
  1. They took out an interest-only mortgage and never repaid the capital
  2. Their mortgage was rescheduled when they got into arrears and still has a balance
The options open to them depend on a few factors:
  1. The size of the mortgage
  2. The Loan to Value
  3. What other assets they have
  4. Will they be getting a lump-sum from their pension fund
  5. What their earnings or pension are
  6. Whether the lender is a mainstream bank or a vulture fund

First of all decide if you want to hold onto your home

If you want to hold onto your home, it should be possible to do so in most cases.

But maybe trading down is a good idea anyway? It's always worth considering.

Or maybe you want to hold onto your home for a few years after the mortgage term ends while the kids are still living with you and then you would be happy to trade down.

Don't panic

Some people panic fearing that they will lose their home as soon as the mortgage term ends. That is very unlikely to be the case. The lender is charging a good interest rate on your mortgage so they will not be in any hurry to repossess your house. They may write you demanding letters but they are unlikely to take any legal action in the short-term as it takes a lot of time and expense.

Keep up your repayments in the meantime

Make sure to make all the repayments as they fall due. This will reassure the lender and make them much less likely to take legal action.


Plan ahead
The lower your mortgage balance is the greater your chance of keeping your home. If you have other investments like shares or savings certs, then cash them and pay them off your mortgage. You can do this well in advance of your mortgage term ending as it will save you interest in the meantime.

If you are relying on the tax-free lump sum from your pension to clear your mortgage, and want to invest your own cash in the meantime, then invest it in liquid investments like shares and not in an illiquid investment like a property. Although you plan to your tax-free lump sum, the rules may change and you might want to work on longer.

Live within your means. If you really want to keep your home, you can't keep your home and change your car every two years and go on three holidays a year.

Can you increase your income? For example, you can earn up to €14,000 a year tax-free through renting a room in your home. This will not appeal to most people, but if it allows you to reduce your mortgage and keep your home, it may well be a sacrifice worth making.

Retirement

You might have been planning to retire at 60 but review those plans. The longer you work, the more you will earn, and the more you will have to pay down the mortgage balance. The longer you work, the more you will contribute to a pension and the greater the pension lump-sum will be.

Talk to your employer. Can you defer your retirement age?
 
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Pension issues

Get to know your pension entitlements and options.
How much of a lump-sum will you get on retirement?
If necessary, can you cash more of your pension? With Defined Contribution pensions, you can usually take out more than the tax-free lump sum and pay ordinary income tax on it. This will reduce your income long-term and might not be tax-efficient. So it's usually a last resort.

Is it worth making additional voluntary contributions now instead of paying down your mortgage?
If you are paying 40% tax now and will be paying 20% in retirement, this is usually worth doing. The downside is that you may need the cash before retirement if your mortgage term expires before you retire.

However, lenders will usually be flexible if they know that there is a lump-sum coming from your pension fund.
 
Sources of finance to clear your mortgage - 1
A life loan from Spry Finance
I am surprised that more people don't know about this option. It's a great product for older people who still have a balance on their mortgage after the term has expired or who want to switch from a vulture fund which is crucifying them with very high interest rates.

In summary, you take out a loan secured on your home and you do not have to make any repayments. But you can pay the interest if you wish.

The amount they lend you depends on your age, or the age of the youngest person in a married couple.

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For example, if you take out a Spry mortgage at age 65 and your house is worth €800k, you will be able to borrow €160k.

I understand that they are planning a new product whereby if you agree to pay the interest for the first 10 years, they will be able to lend you a higher percentage than in the above tables.

The interest rate is high at 6.7%. That is higher than the main banks but lower than the rates charged by some vulture funds.
But it's fixed for life.

Payment options
  • You don't have to make any payments but as the interest rate is high, you should if you can
  • You can pay the interest each year without penalty
  • You can pay 10% of the original loan balance each year without penalty
  • After ten years, you can repay part or all of the loan without penalty
  • You can sell the house at any time and repay the loan without penalty.

Some other points
  • As you don't have to make any payments, your credit record does not matter.
  • The minimum amount is only €20,000 but if you are borrowing such a small amount you would be better off with a family loan or credit union loan.

More information at https://www.spryfinance.ie/how-it-works/interest/
 
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Sources of finance - 2

Can your children lend you the money?

A lot of parents don't want to discuss their finances with their children especially if they have financial problems. But no child wants to see their parents lose the family home.

And many children are better off than their parents.

That is why planning ahead is important.

If one of your children has cash they might be thinking of paying down their own mortgage. But it makes much more sense to give you the cash as you will effectively be borrowing at their favourable mortgage rate.

But make sure it is documented.
 
Spry is an option but a product I dont like. The only way I see any merit in it is if you were at least going to service the annual interest otherwise after 10 years dont expect to be leaving a legacy behind you.

That said it gives an option whereas in reality few other exist
 
Brendan Burgess said:
@Raging Bull

When I update my posts I will address this. If I am facing the loss of my home through having a mortgage, I should forget about leaving a legacy.

Brendan
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Your point is rational except when you deal with older people in debt they tend do want to stay in their property, will not trade down so the product appeals very much to them. As a solution it suits some and as you say some may not care less about a legacy. Ultimately there is a place for it.
 
With Spry, it looks a bit to me like those high interest lenders that used to be (still are?) around such as the likes of Provident Financial. I vould be wrong but it looks and smells a bit like that to me on the basis thay they seem to (prey might be a steong word) target old people. And lets be honest a very vulnerable cohort. Charge high interest and utilise sales gimmickry such as "you can pay the interest if you want". Reality being this high interest loan is secured on the old persons 1 and only asset of note - their home. So they WILL get their pound of flesh when the time comes.

Something i do not like about this model but im sure theres a market for it.
 
Hi jim

The interest rate is high, there is no doubt about that. And there are also admin fees at the start.

But, it's fixed for life.
10% of the capital can be repaid every year.
And they roll up the interest.
And they guarantee no negative equity.

If a 65 year old has access to a family loan, interest-free or at normal mortgage rates, then that would be far cheaper.

Yes, they target older people. Of course they do. That is their target market. It is definitely not preying.

They are very clear about the rates and charges. They illustrate the impact of never paying the interest.

But if you have a mortgage balance of €100k and the lender wants their money and your home is worth €500k, then Spry is an option.

I would much prefer the situation in the UK where there are many providers of this product and they compete on rates and features. Providers include Canada Life, Aviva, Legal & General and Sunlife. When I asked Irish banks why they offer them to their customers, they said that all it takes is a few disgruntled children to go on Joe Duffy claiming that the mean banks robbed their inheritance. And also the cost of actually getting the loan repaid when the person dies.

7 of the best equity release providers (and rates) in the UK

If you want to unlock some of the value in your home, then equity release could be an option. We look at the best providers and their rates.
www.unbiased.co.uk www.unbiased.co.uk


Brendan
 
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Brendan Burgess said:
Will they be getting a lump-sum from their pension fund
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I think a lot of public servants don’t realise how big their lump sum is going to be, that it’s tax free, and many don’t have anything earmarked for it.

In my household we’ll have three public service pensions kicking in at various points in our 60s depending on scheme rules and retirement decisions.

It leaves me comfortable carrying low six-figure mortgage debt to near retirement as I know we’ll be able to clear it from lump sums. In 40s and 50s I’m happy to prioritise other investments.
 
Dr Strangelove said:
In 40s and 50s I’m happy to prioritise other investments.
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Interesting. But it's important to make sure that these investments are liquid in case you want to apply them to clear your mortgage.

Retirement rules may change and you might want to defer retirement or taking the lump-sum from your pension fund.
 
Brendan Burgess said:
But it's important to make sure that these investments are liquid in case you want to apply them to clear your mortgage.
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I kind of think the opposite. I’ll have a guaranteed six-figure lump sum in my 60s anyway so if I have any kind of financial wobble in the meantime I’ll just seek to go interest-only until I can clear mortgage from lump sum. So I can afford to have other illiquid investments with higher risk.

Brendan Burgess said:
Retirement rules may change and you might want to defer retirement or taking the lump-sum from your pension fund.
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Not for public sector workers who get a tax-free lump sum on the day they retire, no sooner, no later. Very little flexibility and low probability of rules changing.

It’s straightforward to estimate the timing and value of a PS lump sum and I feel comfortable knowing I can pay off a mortgage balance with it if I need to.
 
The key is flexibility which allows you to deal with unforeseen events.

For example, you move to a new job and hate your new job or your new boss and you want to retire early.

You love your job and you want to work until you are 70.

Interest rates rise and you want to clear your mortgage early.

There really is no downside to having your money in liquid investments like blue chip shares.

Brendan
 
Brendan Burgess said:
The key is flexibility which allows you to deal with unforeseen events.

For example, you move to a new job and hate your new job or your new boss and you want to retire early.

You love your job and you want to work until you are 70.

Interest rates rise and you want to clear your mortgage early.

There really is no downside to having your money in liquid investments like blue chip shares.

Brendan
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Flexibility is the word!

I used Spry to switch. Referred by a friend who used them, but I also discussed with financial advisor. This was the option that suited me best. Would I have had to sell if this wasn’t there offering my flexibility? Certainly didn’t want to do that. My bank didn’t want to know me.

I was would think I am hardly the only one in the position I found myself in!!
 
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