The higher mortgage interest rates have a negative impact on the pension savings of homeowners

More than a fifth of homeowners with a mortgage say their repayments are keeping them from saving more for retirement, a new study shows.

The findings come from a survey of the financial attitudes and experiences of 5,000 British adults, commissioned by the Equity Release Council and Canada Life.

It estimates that 22 percent of homeowners with a mortgage, about 2.8 million people, find their retirement savings hampered by their mortgage costs.

This number has risen sharply since 2021, when just 14 percent of homeowners said their mortgage was keeping them from saving more for retirement.

According to Moneyfacts, the average two-year fixed-rate mortgage rate rose from a low of 2.22 percent in 2021 to a high of 6.86 percent in the summer of last year.

For a mortgage of €200,000 that is repaid in 25 years, this is the difference between €869 per month and €1,396 per month.

Although the average two-year fixed rate has fallen to 5.74 percent since rates peaked last summer, homeowners coming to the end of their fixed-rate mortgages are still facing a major financial shock.

Of those over 55 who still had a mortgage, 18 percent said that the repayments prevented them from saving more for their pension.

Mortgage costs will probably be lower among this group because the end of the term is approaching.

But almost one in six of this older group said the burden of mortgage debt was preventing them from fully retiring, while one in 10 said their loans were preventing them from reducing their working hours.

The research also shows that 90 percent of homeowners consider it important to be mortgage-free by the time they retire.

However, the reality is likely to be very different: only two-thirds of people with a mortgage think they will pay it off before retirement, and only 60 percent of people aged 55 and over.

Of those over 55, one in five homeowners with a mortgage do not expect to be able to retire mortgage-free, while another 19 percent are unsure.

Younger generations of homeowners with a mortgage also find it less important to retire mortgage-free.

The report also shows how the pressures of managing mortgages – which often involve larger amounts and longer terms than previous generations – are having a major impact on people’s wellbeing today.

Of all homeowners with a mortgage, 21 percent said their mortgage debt prevented them from living a comfortable lifestyle on a daily basis, up from 13 percent in 2021.

Mortgage worries also keep 13 percent of people awake at night, preventing 11 percent from moving and prompting 7 percent to put family plans on hold.

Jim Boyd, CEO of the Equity Release Council, said: ‘With higher interest rates causing many people’s monthly mortgage payments to rise, this harsh reality makes it difficult for homeowners to prioritize retirement savings alongside their mortgage and wider accounts.

‘While this may be something they can manage in the short term, the real concern about this spike in mortgage costs is the pressure it puts on people’s financial resilience in the long term.

‘It’s really alarming that mortgage debt has become so uncomfortable that people are having to postpone starting a family, ending a relationship or changing careers.

“Having to push back important milestones and life moments like these is not only disheartening, but can ultimately be harmful to society as a whole.”

Tom Evans, director of retirement at Canada Life, says: “Retirement feels like a distant dream for many, and after a lifetime of hard work, it’s only natural to hope or even expect to be mortgage-free when you reach this milestone.

‘However, as recent years have shown us, unexpected changes can occur, turning plans upside down.

‘As such, many of us will be faced with the possibility of having to adapt our way of life in retirement.’

Older homeowners are turning to equity release

According to the Equity Release Council, over the past five years, over-55s have taken out 201,575 new equity release plans to support their finances in later life.

This level of activity represents a 30 percent increase compared to the previous five years, when 155,082 new plans were closed between 2014 and 2018.

Equity release allows homeowners age 55 or older to gain tax-free access to some of the money tied up in their property.

This can be used to increase income, pay for healthcare, finance home improvements, or for other purposes.

Borrowers get a loan to secure their home – usually up to 49 percent of its value. The most popular type of plan, a lifetime mortgage, leaves them as the sole owner.

The released money, plus accrued interest, is paid back after they die or enter long-term care – although some plans have the option to pay back some of the money earlier, within limits. Above a certain value, early repayment fees may be charged.

The research shows that almost one in three homeowners believe that access to real estate wealth later in life can improve their finances and increase their retirement income, a significant increase from 25 percent in 2021.

More than one in four now believe that a late-life mortgage could be a useful way to boost retirement income, an increase of five percentage points since 2021, when 21 percent felt this way.

Canada Life’s Tom Evans added: “For those considering equity release, it is important to do a lot of research, discuss it with your family first and then engage with a professional financial advisor.”