The arrival of Freedom Day has prompted us to think about how consumers can gain their own financial freedom, something many of us dream of and work towards for decades. An important first step is paying off a mortgage. There can be considerable obstacles, but there may also be unthought of opportunities. Find out more here.
We recently wrote about Freedom Day, what that could mean for you finances and we spoke about Financial Freedom and how that can be planned for. One of the key considerations for many people wishing to achieve financial freedom, as they transition into retirement, is the desire to live mortgage free. So, what do you need to consider?
Paying off your largest debt
In the last few years running up to retirement, you first need to check you’re on track to paying off your mortgage. Now would be a good time to check precisely where you stand, and if you’re behind, find out from your provider if they will accept overpayments to ensure the debt is finally squared. You will also want to ensure that any such payments are realistically and consistently affordable.
A further consideration is how to catch up on missed payments, if you took advantage of any of the well-publicised ‘payment holidays’ available to help borrowers over the pandemic.
Perhaps your existing mortgage deal is coming to an end, and you need to find a new deal?. What can you do to ensure you’re receiving the best rate? Can you shop around and compare the offers on the market to ensure you have the best possible deal for your circumstances? If you switch mortgage deals and payments reduce, you could consider keeping payments at their previous level in order to repay your mortgage earlier.
What if you’re on an interest only mortgage?
Interest only mortgages were very popular in the past, but only work where there is a plan in place to repay the capital at the mortgage redemption date. Without the means to clear the debt, this is where becoming mortgage free could be potentially very difficult.
If you have a portion of your mortgage which is interest only, now might be a good time to talk to your lender to discuss the options that are available. If you don’t have a plan to repay the principal part of the mortgage, then you will need to find a way to clear the debt.
One possibility, depending on whether you have any equity in the property, might be to look at equity release, which essentially entails taking on a Lifetime Interest Only Mortgage. However, if you do choose to re-mortgage to make lifetime interest only payments, you may find that you still haven’t significantly reduced your regular outgoings, and mortgage freedom may still elude you.
Another avenue to becoming mortgage free, is to consider repaying any outstanding mortgage, via an unsecured loan. Naturally, you will need to demonstrate that you can comfortably afford the repayments. Once you’re over 55, the amounts available by lenders tend to reduce, and the terms on offer also tend to differ. However, at free2, we offer the Over 55s Unsecured Loan, which is aimed at borrowers over 55 based on their income over the term of the loan, and is not tied to their property. Available in amounts from £15,000 up to £150,000, over terms of 5 to 20 years, it can be used to clear any outstanding mortgage required by a lender.
Of course, another way to become mortgage free could be to move to a smaller home, or to a different part of the country. But downsizing comes with its own costs and benefits. It’s important to do the sums, as you may find that the costs of selling, buying, packing and moving home with all the various related taxes, charges and fees – may ultimately outweigh the costs of taking on an interest only mortgage for life via equity release, or paying off your mortgage outright through an unsecured loan.
In our next blog, we’ll discuss what you might be able to do once you’ve paid off your mortgage, and look at a case study of how a couple achieved their financial freedom. It could be closer for you than you think.
The Funding Comparison Tool is not intended to provide personal financial advice and any action taken will be your own responsibility. If in doubt, please seek advice from a professional Financial Adviser.
Free2 Limited (trading as free2) is an Appointed Representative of RS Consumer Finance Limited (RSCF) which is authorised and regulated by the Financial Conduct Authority (the FCA). free2 is a credit broker, not a lender, and will only offer loans from RSCF – an offer of credit is subject to status and affordability. Terms & Conditions apply. www.free2.com