Mortgage blog: Is your pension the solution to your interest-only mortgage problem?
Among the announcements made by George Osborne in the 2014 Budget was a change to the way that pensioners can access and use the savings they have made for their retirement. From April 2015, you will no longer have to buy an annuity with your pension fund and instead will be allowed to use your retirement savings for any purpose.
Mortgage experts believe the change could come to the rescue of thousands of people struggling to find a way of repaying their interest-only mortgage.
Borrowers can use pension savings to repay their mortgage
A 2013 study found that over a million homeowners in the UK may face a shortfall when they come to pay their interest only mortgage. The City regulator found that 1.3m householders may not have enough savings to repay their interest-only mortgage and faced an average shortfall of £71,000.
Now, changes to the pension system announced in the Budget may be set to help. George Osborne announced that, from April 2015, pensioners will be able to access all of their retirement savings, subject to a 20% tax charge.
Keith Osborne, editor of Whathouse.com, says: "In future, homeowners with an interest-only mortgage will be able to use their pension lump sum to repay their loan. For over a million people expecting to face a shortfall this could be a huge benefit."
Over a million homeowners facing an interest-only shortfall
Interest-only mortgages were popular in the 1980s when they generally ran alongside an endowment policy designed to repay the loan. They made a reappearance in the years before the global financial crisis, allowing borrowers to keep their mortgage repayments to a minimum.
While you should have a plan to repay the capital you borrowed, many people will face a shortfall when their mortgage term ends. In 2013, the City regulator found that around 600,000 of the total 2.3m interest-only mortgages were set to end by 2020, with many held by people on the cusp of retirement.
Whathouse.com's Osborne sounds a note of caution: "Of course, if pensioners are using their retirement savings to repay their mortgage then they may struggle for an income in later life. The aim of a pension fund is to provide a regular income to see you through your retirement years. If you've used the cash to repay your interest-only mortgage then you may face financial difficulties later on in life."
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