Retirement Plans Fail To Account For £177,750 Mortgage Bill
The Law Of... ensuring retirement plans consider every possible expenseA recent article has outlined how a shared appreciation mortgage has left a 90-year-old widow facing a huge mortgage bill.
Examining the details of the case, Nicola Hartley – Independent Financial Advisor at Simpson Millar
– explains how a late change in the widow's retirement plans could have caused the large mortgage bill.
Facing A Large Bill In Retirement
The large mortgage payment, which is the result of a shared appreciation deal, is only owed by the pensioner now because she is looking to sell her property.
Under the shared appreciation mortgage, which is no longer available, the pensioner and her late husband took out an initial loan of £22,500 and would not have to repay the loan or any interest until the house was sold.
One of the main conditions of shared appreciation mortgages is that the lender receives a percentage of any increases in valuation of the property.
As house prices in the UK have increased significantly since the couple took out the loan in 1989, the bill is significantly higher than the pensioner may have expected.
The couple's home was valued at £95,000
when they took out the loan; it is now worth £320,000
– which means the lender has secured a 690% profit on their initial outlay.
With a view to downsize from the 3-bedroom family home, it is unlikely that the pensioner will be able to secure another appropriate property with the remaining money after the bill is settled, thus highlighting the issue of facing a large expense after retirement.
Considering Expenses When Planning For Retirement
The widow's late husband lost his pension in the Robert Maxwell fraud saga, meaning that the couple probably rushed into the loan to ensure that they had some funds to retire on.
While it was impossible to predict that house prices in the UK would increase as they have over the last 2 decades, Nicola explains that the discovery of this bill suggests that the pensioner is moving away from her original retirement plan:"Taking out a mortgage that is linked directly to house prices in the direct run up to retirement would suggest that downsizing was not part of an initial retirement plan.""While it is impossible to plan every minute detail of retirement, it is important to consider all of your options and cost up various plans.""In this instance it would seem that downsizing was not part of the initial plan, meaning that the widow is considering it well into her retirement, which is causing serious complications.""Many of the individuals whom I advise do not even consider downsizing in their plans, as they understandably want to stay in their family home; however, it is important that this option is priced up and planned for early, just in case circumstances change and a downsize is necessary.""My advice for all retirees, or those who are currently planning for their retirement, is to consider as many scenarios as possible, so if unforeseen developments require a significant change to a retirement plan they are protected from the financial hardships that such a change could entail."