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Everything is more expensive nowadays — including the cost of retirement.
Rising prices and soaring bills have pushed up the minimum income level you’ll need for the most basic retirement by almost 20 per cent compared with a year ago, according to the Pensions and Lifetime Savings Association.
Even if a retired couple scrimp and save with no foreign holidays, no car, one meal out a month and less than £100 a week to spend on groceries, they will now need a minimum of £20,000 a year to get by. This assumes they have paid off their mortgage in full.
As interest rates on home loans have risen and the length of loans increase, I wonder how many of us will reach this goal in future?
If your retirement savings pot has been pulverised in the past year (and whose hasn’t?) you may have taken comfort from the fact that house prices have held up.
It’s been a while since I’ve received one of those letters from an estate agent saying: “We’ve just sold a home on your street for much more than you ever dreamt yours could be worth.”
Even if you have no plans to sell, that smug, psychological boost you get as your home rises in value has been replaced by a sense of dread. The equity you’ve amassed is about to be zapped by falling house prices, and to add insult to injury, monthly mortgage costs are set to soar for millions with a wave of defaults predicted.
The more optimistic estate agents point out that even a 20 per cent fall in house prices would take us back to pre-pandemic levels. However, it will drag down loan-to-value ratios for 1.4mn borrowers set to refinance a fixed-rate mortgage in 2023.
Younger homeowners, who tend to have less equity, will find this affects the interest rate they can secure.
For those who can access the best interest rates, moving from 2 per cent to a 6 per cent deal on a £250,000 repayment mortgage would cost borrowers nearly £500 extra a month, based on a 25-year term.
However, for those with interest-only mortgages, the jump would be well over £800. Ouch! And they’ve still got the problem of how to repay the capital.
Advisers say this is already causing issues for those relying on property to plump up their pension.
Gary Smith, a chartered financial planner at Evelyn Partners, has one client with a portfolio of six buy-to-let properties, all financed on interest-only mortgages which expire later this year.
“After mortgage interest costs and before tax, they’re currently making £24,000 a year in rental income,” he says. Based on current interest rates, this is likely to drop to just £4,000 after refinancing.
Readers may struggle to have much sympathy for buy-to-let landlords, but I do worry about the consequences for renters as landlords attempt to pass on these higher costs, and potentially spend less on the upkeep of their properties.
When rates were low, Smith says another popular trend was taking out an interest-only mortgage on your main residence to buy a second home abroad. “Although a lifestyle rather than an investment decision, people could now be forced to sell their holiday homes to repay these loans as rates increase,” he says.
Equity release has funded the retirement dreams of many who lack a decent pension income, but advisers say the cost of living crisis is already causing issues to emerge.
Smith uses the example of a married couple who have released equity in their family home. “On the death of the first spouse, will their partner have enough income to cover the energy bills and council tax on a large property? Even if the interest is rolled up, with property prices falling, there could be very little equity left if they want to sell up and downsize.”
The combination of rising rates and falling prices also means those considering equity release in the future will have a lot less time before their equity is wiped out by interest charges.
While we’re talking about unwise financial decisions, what about scaling back your investments to get mortgage-free more quickly?
If your mortgage deal is about to expire, you may be tempted to use your savings to pay down a big chunk.
Andrew Wheeler, head of partnership business development at RBC Brewin Dolphin, says he can understand this compulsion — even though investing offers better potential for long-term returns.
“Bank deposit rates aren’t mirroring mortgage rates, and a lot of people are fearful that inflation and interest rates will carry on creeping up,” he says.
“Additionally, people are looking over their shoulders and worrying about redundancy. For many, paying off a lump sum and reducing their ongoing monthly costs feels like the right thing to do — especially when markets are struggling.”
Advisers also tell me their clients are taking lump sums from pensions to pay down not just their own mortgages, but their adult children’s home loans. Smith says some are even considering selling investments to do this.
Anecdotally, Wheeler says Brewin’s clients are not itching to pay down their offspring’s mortgages but are aware they could become the “lender of last resort” if the jobs market takes a turn for the worse.
Whether to pay off a chunk of this debt or simply cope with higher monthly repayments, budgets are having to be rebalanced — and savings and investments are in the line of fire.
This week, one reader confessed she was diverting the £40,000 she usually pays into her self-invested personal pension (Sipp) into paying off part of her mortgage. I didn’t have to tell her the reasons she might not want to do this — she already knew these, but she couldn’t override her gut instinct that it was the best use of her money.
Irrational perhaps, but it could satisfy the “sleep at night” test. How could people weigh up a decision more rationally?
“A lot depends on your risk appetite, and how close to retirement you are,” says Smith. “If you think you can generate a return on your investments that outstrips your mortgage rate, it makes sense to stay invested. But if you have a low risk portfolio and the best you can hope to achieve is 3-4 per cent, then redirecting some of that money to paying down debt could potentially be better.”
The other big lever you could pull? Working for longer. A hashtag that’s frequently appearing in online forums dedicated to early retirement is #OMYS (“one more year syndrome”) describing people who have reached a financial position where they think they could stop working, but nevertheless feel the urge to carry on.
Is this irrational or sensible? As we wait to find out how much property prices could plunge and interest rates could rise, I’m all in favour.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com
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