New inflation alert – bang goes retirement as millions will never clear mortgages | Personal Finance | Finance
Markets are now certain that the Bank of England will raise base rates for the 13th time in a row tomorrow, the only question is by how much. After this morning’s disastrous inflation figure, there is growing sentiment that he may raise bank rate by 0.5 per cent, taking it to five per cent.
Today’s headline rate of consumer price inflation of 8.7 percent was higher than the 8.4 percent expected, exactly the same as in April.
But that wasn’t the worst of it.
Core inflation, which cuts out more volatile items such as food and fuel, rose to 7.1 percent in real terms.
Inflation is not going away.
The average two-year fixed rate residential mortgage already charges more than six per cent, Moneyfacts said, and that could soon hit 6.5 per cent.
Oxford Economics warns a million homeowners whose fixed deals will expire in the second half of this year will face an average rise in annual repayments of £5,304.
That’s an extra £442 a month, on top of rising tax bills and general living costs, and many can’t afford to pay more.
Desperately searching for ways to cut costs, cash-strapped homeowners will be tempted to reduce what they pay into pensions and savings Isa.
Experts are urging them to resist if they can. Otherwise they risk doing long-term damage to their finances and ruining their retirement plans.
It won’t be easy, though.
Today’s mortgage crunch will make it even more difficult to clear debt and build retirement savings.
More than 1.5 million Britons are already working over the age of 65 to make ends meet, up by a fifth in the past five years and expected to rise even higher.
The rising state pension age will make matters worse, as it starts to rise to 67 from 2026, then to 68 and beyond.
Anyone who wants to retire before that needs to build up enough pension savings and an Isa to cover the gap, and clear debts if they can.
A sudden recovery in mortgage costs and rent payments is sure to have a disruptive impact on retirement savings, said Gary Smith, a financial planning partner at wealth manager Evelyn Partners. “Just as the cost-of-living crisis is taking a toll on retirement savings, the cost-of-borrowing crisis will hit those with outstanding debt.”
This could affect everyone from first-time buyers cutting back on pension savings to get on the housing ladder, to middle-aged people taking on marathon mortgages that run well past state pension age.
Those nearing retirement age could see their plans ruined, as they struggle to pay the mortgage at today’s higher rates, Smith said.
Some homeowners are responding to the crunch by extending their mortgage term to 30 or 40 years.
This provides short-term relief but means that it takes longer to pay off the debt while the total interest payments rise and end up costing much more.
Many people may also find they can’t pay off the debt before they retire, Smith said. “Savers will be tempted to use their 25 per cent tax-free lump sum to pay off their mortgage. This is not an unusual strategy at all but it leaves less savings for retirement.”
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Smith is concerned that many may opt out of their workplace auto-enrolment pension schemes, to save the four per cent of salary they have to pay.
But in doing so, they will lose out on their employer’s contribution of three per cent, and tax relief of another one per cent.
Effectively, they are refusing free money.
Despite this, pension contributions have already been cut by one in six workers and this could rise to one in four, according to the LCP consultancy.
Smith encouraged those affected to continue saving if possible, and find other things to cut.
Those with some cash floating around could use it to pay off some of their mortgage equity, said Emma-Lou Montgomery, associate director of personal investment at Fidelity International.
“Most lenders allow you to repay 10 percent of the capital each year without penalty. Doing so could reduce your mortgage balance and potentially give you a better option for lower loan-to-value rates when you remortgage.”
Amanda Aumonier, head of mortgage operations at Better.co.uk, suggested talking to a broker to get a competitive deal as your mortgage nears maturity.
If you are struggling today, talk to the lender. “Options may include payment breaks, extended repayment periods, interest only or switching to a more affordable home loan. Otherwise, look to increase your income if you can.”
Reducing pension contributions should be a last resort. Unfortunately, an increasing number may be asked to do it anyway.
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