Will you still be repaying your mortgage in retirement? You’re not alone. Almost one in three people expect to be making repayments after the traditional retirement age of 65.
But how are you going to do it? By continuing to work past retirement age or overpaying on the loan now?
Or is it smarter to put any spare cash into a pension and pay your mortgage from that?
Here are some tips from the experts.
Repaying a mortgage into retirement never used to be common. But the age at which the majority of householders own their home outright has been increasing steadily – up from 56 years of age in 1991 to 59 in 2022.
“I don’t see a trend of current 65-year-olds having to work longer to fund mortgage repayments,” said financial planning consultant Daniel Hardiman, of Hardiman Life & Pensions.
But it’s a different story for many millennials and those coming after.
“I anticipate this will be more of an issue in 10 to 20 years' time, considering the typical mortgage that first-time buyers now have to take out,” Hardiman says.
First-time buyers are also older now when buying their home. House prices, bank-lending rules and settling down later are all factors. The median age of a house buyer is now 39, up from 35 in 2010, figures from the Central Statistics Office show.
In all, 54 per cent of people aged 25-34 now expect to still have a mortgage by the time they retire, said a survey commissioned by insurance broker Gallagher in Ireland.
Dublin dwellers are least likely to believe they will own their home outright in retirement – more than half of them hold this view. They are also most likely to say they will have a “significant” mortgage overhang after the age of 65.
With mortgages now routinely offered up to the age 70, and up to 80 by some providers, more of us need to make a plan on how we are going to pay it back.
Overpay now
Overpaying your mortgage, if you can afford to, is an extremely effective way of shortening the term and paying less interest, says Martina Hennessy, chief executive of mortgage advisers Doddl.ie.
Take a couple in their 50s whose mortgage term is expected to run until the main earner is aged 69. They have an outstanding balance of €260,000 and a rate of 3.5 per cent. They would like to retire at age 66 with the mortgage paid off.
Overpaying the mortgage by €420 a month now will shave three years off the mortgage term, clearing the outstanding balance over 11 instead of 14 years, Hennessy says.
This way, the couple will be mortgage-free by the age 66. It will also save them €15,736 in interest too.
If they continued to just make standard mortgage repayments over the full 14-year balance of the loan, they would still have €66,884 to pay off when they were 66, with three more years on the loan.
Finding an extra €420 a month now to bump up repayments will not be easy for many households. But mortgage repayments of about €1,860 a month for three years in retirement could be challenging, too, depending on pension income.
Had they taken action even earlier in their mortgage, the couple in our example could cut even more from their mortgage term and interest bill at a lower monthly cost. This is what some younger borrowers are now doing, Hennessy says.
“Some clients like to increase their monthly direct debit to overpay their mortgage once they have settled into their new home or as their income rises,” she says.
A mortgage has two parts: the capital is the sum of money you borrowed and the interest is the fee the bank charges for giving you the loan. The lowest rate at the moment is around 3 per cent.
The interest is charged as a percentage of the capital balance – so the interest hits the outstanding capital balance every month and determines how much of the repayment is interest and how much is actually clearing the capital balance.
At the start of the mortgage, when the balance is high, most of your monthly repayment comprises interest.
“If you overpay at the earlier stage of your mortgage, when the capital balance is highest, it is very impactful and will significantly reduce the overall interest that you repay,” Hennessy says.
If a borrower with a €300,000 mortgage over 25 years at 3.95 per cent overpaid their mortgage by €100 a month, or circa €23 a week, they would reduce their term by 2.5 years and save €18,722 in interest, says Trevor Grant of Affinity Advisors and chairman of Irish Association of Mortgage Advisors.
This could be the difference between being mortgage free at 65 instead of 68.
Some homeowners make a point of earmarking a pay rise or reduced childcare costs as an opportunity to overpay their mortgage rather than letting the extra disposable income get absorbed by lifestyle creep.
“Increasing your monthly direct debit makes you disciplined in ensuring part of your increased earnings or disposable income is accelerating the repayment of your mortgage, something which your future self will be glad you did,” Hennessy says.
Using a work bonus, commission, an inheritance or a self-employed person’s after-tax surplus to pay a lump sum off your mortgage is another option.
A lump sum can be used either to reduce your monthly repayment or to keep the repayments the same and reduce your term, Grant says. In terms of cutting the cost and term of your mortgage, the latter option makes more sense.
“The earlier you pay a lump sum off [the loan], the bigger the savings,” he says.
Putting any lump sums into your mortgage should only be done as part of an overall financial plan, however, he says. Pension, future financial commitments (such as children’s education), your cash requirements and an emergency fund must be considered too.
Switch mortgage
The most effective step you can take to make your mortgage cheaper, and so put yourself in a better position to overpay, is to keep sniffing out the lowest interest rate. That means switching.
The highest mortgage interest rate in the mainstream market is over twice that of the lowest which stands at 3 per cent, according to Doddl.ie. “For an average mortgage amount of €334,189 over a 25-year term, you could save up to €7,189 by reviewing your rate and switching,” Hennessy says.
But before you switch to a cheaper fixed rate, make sure the lender allows overpayment. Most banks will allow overpayment of 10 per cent of your monthly repayment or 10 per cent of the capital balance outstanding each year on a fixed rate.
If you reduce your mortgage interest rate by switching mortgage then continuing to make your repayments at the higher rate can reduce the term of your loan faster.
Only 10 per cent of borrowers use the overpayment option, Grant says, based on lender feedback. So if you are not overpaying your mortgage, you are not alone, it seems.
If your lender does not allow overpayment on their fixed rate then you could look at a split mortgage option, Hennessy says. This leaves part of the mortgage at a variable rate so that you can overpay without penalty.
Pension plan
Some experts say any spare cash is best pumped into pension, rather than being used to accelerate payment of mortgage debt. Your money can grow and compound over time in a pension – and of course you get generous tax relief on pension fund contributions. The resulting pension pot can then be used to pay your mortgage in retirement.
The right choice for you depends on a number of variables, Hardiman says.
“These include the projected value of your existing pension, your current pension contributions, your risk appetite, what rate of interest you are paying on your mortgage and whether you would like to keep working after the age of 65,” he says.
Just like overpaying on a mortgage, contributing to a pension sooner rather than later amplifies the benefit.
“If a person qualifies for 40 per cent tax relief on their pension contributions, you would expect that investing more in pension would leave them in a better overall financial position after the age of 65 than overpaying their mortgage,” Hardiman says.
“We do find if clients still have an outstanding balance on their mortgage when they retire, they tend to use a portion of the 25 per cent tax-free lump sum from their pension to clear their mortgage.”
This only works is they have a sufficient size of pension pot to do so, of course.
“Clients don’t want to have a mortgage when they retire and if they are using a portion of their pension on mortgage repayments, it is going to curtail the potential for other aspirations that they may have in retirement,” he says.
If it is your plan to repay from your retirement funds then you will need to make sure you have enough. In general, the longer the time frame to retirement, the greater the impact that pension contributions can have on increasing your pot.
Paying into a pension can be a hard sell. Being mortgage-free can seem a far more tantalising prospect.
“In my experience, clients prefer the psychological benefit of overpaying the mortgage every month as they can visualise the excitement of reaching the point where their mortgage is cleared, eliminating that monthly expense for their future,” Hardiman says.
People are more likely to cut unnecessary day-to-day spending if it means clearing their mortgage sooner, he says. “We don’t find the same discipline when it comes to investing in a pension.”
Neglecting your pension to focus on accelerating mortgage repayments, especially early in your career, is not a great idea, considering the combined benefit of tax relief on pension contributions and investment growth compounding over time, Hardiman says.
Whatever approach you take, if you are taking out your first mortgage now then think ahead. Longer mortgage terms are becoming increasingly available.
The best tip to avoid paying off your home in retirement is to take out the shortest term you can afford. Monthly repayments will be higher, and you may be able to borrow less, but you may have a better chance of retiring mortgage-free.
