Interest-free mortgages - the debt that could ruin retirement

New research from AgeUK suggests that hundreds of thousands of people who have only been paying the interest on their mortgages will not be able to pay them off when they fall due – for many, because they have under-estimated the size of their pension savings.

AgeUK estimates that 40,000 interest-only mortgages held by people over 65 will become due every year from 2017 onwards.

And their research suggests that there is a huge gap between what people think they are going to owe, and what the final amount is likely to be.

When asked, borrowers said they thought they would owe just over £22,000, on average. But the latest estimate by the Financial Conduct Authority is that nearly half of people with interest-only mortgages will actually still owe £50,000.

The Chancellor’s lifting of restrictions on the use of pension pots in the Budget may have encouraged many to believe that they will be able to pay of the mortgage this way.  But the average pension fund currently stands at £36,800 – again, significantly less than the average interest-free mortgage final balance.

Debt Advice Foundation chief executive David Rodger commented: “We are extremely worried that more and more people are facing real debt problems when they retire.  In addition to interest-free mortgages, huge numbers of people will retire with large outstanding balances on credit cards and not enough pension income to make the repayments.

“And if they raid their pension funds to pay off these outstanding debts, they will leave themselves with nothing to fall back on in later life.”

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