Should I retire with a mortgage?

Q. I want to retire at 55, which is in five years’ time. However, I still have nine years of repayments on my mortgage. I think I could just about afford the repayments for those first four years of retirement, but it might be a squeeze. Is it a bad idea to retire while still owing money on my mortgage?

A. As more people get on the property ladder later in life, this is likely to become an increasingly common dilemma. Can you afford to retire with a mortgage, or will you need to keep working while paying it off?

I completely understand why you would not want to delay your planned retirement date. If you continue working until your mortgage is paid off, you will have missed out on four years of early retirement. At age 59, who knows if you will feel as active and healthy as you do at 55.

There's nothing inherently wrong with retiring while still having a mortgage. The question is whether you can afford it and whether that would negatively impact how long your money lasts.

It sounds as though you have run the numbers and retiring at 55 might just be feasible. But have you stress-tested those plans?

• Read: How to retire at 55

Mortgage rates have been increasing as the Bank of England is expected to raise interest rates. Some deals are now charging 6% or more. Could your retirement budget cope if your mortgage rate was 6% or possibly even higher?

Inflation has also been ticking back up and was 3.1% in August – well above the Bank of England’s target of 2%. If the cost of living continues to track higher than expected, that could eat into your retirement budget and make it harder for you to keep up with mortgage repayments.

And, remember, there will always be unexpected expenses in retirement – whether it’s property repairs, helping out younger family members, or care costs later in life.

• Read: How to inflation-proof your retirement savings

If you decide it’s going to be too much of a squeeze to continue those mortgage payments into retirement, you have options.

Some savers use their pension to clear their property debt before they stop working. Most people can take up to 25% of their pension tax-free (up to a maximum of £268,275) once they reach a certain age. This is currently 55 but rising to 57 from 2028. You could use part of this money to overpay your mortgage.

However, that will leave you less money in the pot to fund the rest of your retirement. If, as it sounds, your retirement finances don’t have much wiggle room, this may not be the best idea. You should also check whether your lender charges any penalties for early repayment.

Another option is to continue working. This doesn’t have to mean carrying on in the same job you were doing before or recreating the exact same salary. You could reduce your hours, do some consultancy work, or move into a role that's more enjoyable, even if it pays less.

• Watch: Should I use my pension to pay off my mortgage?

Even a part-time job that covered the cost of the mortgage could make a big difference and might be a nice way to ease into retirement gradually.

It doesn’t need to be an either/or between overpaying the mortgage and working longer. You could put some of your pensions tax-free cash towards overpaying part of the mortgage while continuing to work part-time as you repay the rest. In this scenario, you could potentially even continue adding to your retirement savings as you work.

If neither of those options appeal, you could consider a retirement interest-only mortgage. With this kind of loan, you only repay the interest and not the capital owed. The capital is typically repaid from the sale of the property when the borrower dies or moves into long-term care.

However, these won’t suit everyone, and you will need to show the lender you can afford the repayments.

The final option is to consider swapping your property for something less expensive. By downsizing, you could reduce your mortgage debt to something manageable (or get rid of it entirely) while also choosing a home that’s more future-proofed for your retirement.

A property that’s smaller and better adapted for you as you age could help you to remain at home in future rather than needing to move into a care home if your health deteriorates.

The key things to remember are:

1. You have options
2. Stress-test your plans under different scenarios to find the approach that works best for you personally

The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Our retirement specialists can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

Please remember this is not financial advice. If you’re unsure about what’s right for you, you should speak to a qualified financial adviser.

This article was originally published in City AM.

• Read: Am I saving enough? This one graph will tell you
• Read: State Pension under a new ‘Triple Lock’
• Read: I’m 53. How do I know when to retire?     

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.