The Law Of… ensuring retirees aren’t caught out by unexpected bills
The news of a 90-year-old widow facing a £177,750 bill to pay off her mortgage, which was worth just £22,500 when it was initially taken out, has highlighted the importance of considering all bills and possible expenditures that could arise after retirement.
Responding to the news and advising on how to properly prepare for retirement, Nicola Hartley – Independent Financial Advisor at Simpson Millar – warns of the importance of considering future expenditure when planning for retirement.
Shared Appreciation Mortgage
The reason a large mortgage bill is outstanding on such a small initial loan related to the type of mortgage the pensioner and her late husband took out in 1989.
Shared appreciation mortgages, which are no longer offered by lenders, saw home owners receive an interest free loan for a percentage of the value of their home. Their loan did not have to be repaid until the property was sold, at which time the bank also received a percentage of any increase in value of the property.
Due to the legal complications of such a deal, all home owners that took out a shared appreciation mortgage were advised to seek legal advice prior to agreeing to the deal.
The issue with shared appreciation mortgages is that the home owners that are still tied to such a deal could not have anticipated that house prices in the UK would skyrocket in the way that they have done – in this instance the house was originally valued at £95,000 and is now worth £320,000, securing a huge profit for the mortgage lender.
Planning For Retirement
It is claimed that tens of thousands of home owners signed up to shared appreciation loans in the 1980s, if this is the case then a large number of pensioners planning to retire in the coming years may find themselves in the same situation.
Due to the zero interest nature of the loan, the mortgage type may have been appealing at the time, especially as the late husband of the retiree featured in this story had lost his pension in the Robert Maxwell fraud saga.
Nicola explains the lessons that can be taken from this case:
“Like thousands of other employees of Robert Maxwell, It seems as though this family’s retirement plans were scuppered after the late media mogul’s demise.”
“The shared appreciation mortgage that they took out at the time was a huge gamble, as they were ultimately risking how much they owed to the bank based on fluctuations on the property market.”
“While it was impossible to predict the way that the housing market would have changed after they took out the loan, the husband and wife in this instance should have sat down and really considered how such changes could affect their retirement.”
“When making retirement plans, it is unlikely that the woman in this case had planned to downsize – many of the pensioners that I advise are determined to stay in the home where their family grew up – however this is a necessary step for some pensioners who need to release a large sum of money to help support their living costs.”
“Without prior planning, this retirement plan of downsizing has been scuppered by outstanding debts.”
“My advice for any other recent retirees, or those who are planning for a retirement, who have a shared appreciation mortgage would be to figure out how much you would owe your lender if you were to sell your property – as it is only after you have this figure can you calculate how much you would have left from the sale to go towards your retirement fund.”