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The homeowners walking into a pension crisis
With people buying their first property later, pensions are being overlooked – so what should homeowners do?
by Michelle McGagh on Sep 05, 2012 at 11:01
A decade of unprecedented house prices rises has resulted in people buying their first property later as they struggle to scrape together increasingly large deposits.
Although it is harder to get on the ladder, there has been some respite for those who get there as interest rates on fixed and variable mortgages have fallen. This means that typical monthly mortgage repayments for a first-time buyer with a 20% deposit have decreased to around 29% of take home pay, down from 40% before the financial crisis, according to figures from Nationwide.
Mortgages are getting longer
However, borrowers are trying to reduce their repayments even further by taking out longer mortgage terms.
Robert Gardner, Nationwide chief economist, said: ‘In practice this decline [in repayments] is slightly more pronounced than this. Borrowers, especially first-time buyers, have been increasing the term of their mortgage in recent years.
‘The average term for first-time buyers is currently 28 years, up from 25 years over the 2005 to 2007 period. While this increases the total amount repaid over the term of the loan, it lowers the monthly repayments.’
Impending pension crisis
With the average age of a first-time buyer standing at 29, according to Nationwide, and the average mortgage term 28 years, you don’t have to be Einstein to work out that the average first-timer will be 57 by the time their mortgage is paid off. The Council of Mortgage Lenders also places the average first-time buyer at age 29, but for those buying a property unassisted the average age soars to 37 – meaning they would be 65 by the time they have paid off their mortgage.
At 65 most people see themselves retiring, and although they may just retire mortgage-free, the increased mortgage burden could see pension saving become uneconomical or pushed to the bottom of the list as people try to pay off the mortgage.
Jason Witcombe, a director of London-based independent financial advice firm Evolve Financial Planning, said there was ‘definitely a trend’ for older people to still have a mortgage coming up to and even in retirement.
He said the ‘combination of high house prices and high day-to-day expenses like fuel, food and taxes puts pressure on household finances’, meaning people put getting on the property ladder at the expense of other savings.
‘The trouble is that people are stretched and their mortgage is taking up most of their income – there is trouble brewing, particularly if mortgage rates go up there will be a problem.
‘However, I do not think there is a problem extending your mortgage terms to 28 years if you expect to work longer. What you will find, though, is that people remortgage at 25 years each time.’
Get ready to downsize
The lack of pension saving means homeowners will have to become more comfortable downsizing in retirement and using the equity in their property to provide income.
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