Paying off your mortgage before retirement may not always be the best idea.
People strive throughout their working lives in order to attain their main financial goal – to have their mortgage repaid before they reach retirement age. But what happens when you have to bring your interest only mortgage into retirement?
During one’s life, a mortgage will be the greatest financial outgoing expense each month and consequently is seen as a millstone around one’s neck. Hence, this is the reason to strive and eliminate this debt as soon as possible; the usual goal preferably before retirement.
According to the statistics, there are still approximately 12% of people carrying their interest only mortgage into retirement with a substantial average balance of almost £60,000!
Attitudes are changing. The mentality of the older generations that debt is bad has dwindled and people can now see how an interest only mortgage into retirement can actually assist their pensioner lifestyles. Particularly in 2013 with the Bank of England base rate at an unprecedented run at the lowest interest rate in history at 0.5%. Yes, retirement savers are suffering as a consequence, but the retirement borrowers are benefitting and using this situation to their advantage.
Therefore, having a retirement mortgage may not be so bad. Many people may have selected this option, rather than feel short of cash. Rather than a large mortgage, by keeping some semblance of borrowings into retirement, property owners can also use this mortgage to assist with estate planning and thus enabling mitigation of any potential inheritance tax (IHT) paid by their beneficiaries after they die.
This would involve totalling the assets; which would include the property and its contents, any savings/investments and then deducting the liabilities such as loans, credits cards and bills. If the mortgage is substantial, this will significantly impact on the net value of the estate and reduce any potential inheritance tax that may be due.
There is one way to get around inheritance tax and that is to pay any money to your children before you die. You can give little gifts well under the capital gains tax amount and gifting amount each year that would essentially take care of inheritance tax after your death. It is one way of making things a little positive in your retirement; especially, with an interest only mortgage into retirement.
Nevertheless, this may not be the only advantage. Another popular reason for carrying on with a mortgage into retirement could be that the home owner could use the additional capital to increase monthly income and pay for lifestyle improvements. Considering the alternatives and living your longest holiday in constant financial plight, this makes a sensible option. Particularly the case as the beneficiaries may only need to sell the property anyway to pay the potential inheritance bill after you die.
Popular reasons for raising extra funds can be improvements to the home, buying a car, caravan or holiday home to retire and relax with. In today’s environment of first time buyer’s difficulty in obtaining mortgages, then how useful could it be to gift money to children, even grandchildren now and enable them to get on the first rung of the housing ladder. It is possible with the interest only mortgage into retirement as well as a couple of other products in the lifetime mortgage industry.
The usual health warnings come with this. Any gifts made from one’s estate when over the inheritance tax threshold should be considered carefully. The seven year rule exists in that you need to survive this period after the date of the gift; otherwise it can still be included as part of the overall value of the estate.
The key to the interest only mortgage for your retirement period is making a payment on interest that accrues each month. The principle balance remains unpaid until the house is sold, but you make payments reducing the amount at the end. For some coming up with the monthly interest payment is not possible.
You have alternative lifetime mortgage options that can reduce your need for a monthly payment like the drawdown mortgage that offers a smaller lump sum and then withdrawals as you need them. By considering all alternatives you can decide if the interest only lifetime mortgage is the best product for you and your family during your retirement.
Therefore, taking an interest only mortgage into retirement has its advantages and disadvantages, however if one has the resources to fund the repayments, then they aren't such a bad concept after all. This kind of schemes aren't only restricted to those in the UK, residents in Northern Ireland can also equally apply for them, for more information on Northern Ireland residents looking to take an equity release out on their home click here.
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