Debt is set to become a huge issue in the coming months and years. Rishi Sunak, along with the wider government, has launched several support measures in recent months which will need to be repaid eventually. On top of this, a new report has highlighted that the public is likely heading towards a debt problem that will hit pensioners particularly hard.
- Pension warning: Debt for the over 55s is set to reach £300billion
Yesterday, research from more2life revealed that the over 55s could see their owed debt levels increase by 42 percent by 2030, reaching around £300billion.
This could be disheartening for the nation’s retirees but Jim Boys, the CEO at the Equity Release Council, explained that there may be a solution for some people affected by this financial problem.
As he detailed: “more2life’s insightful Later Life Lending Report reveals the potential scale of the long-term impact the pandemic may have on the finances of the UK’s older generation, with debt becoming more common for people in later life.
“To address the challenges this presents, it is crucial that older consumers understand what options are available to them.
“While not suitable for everyone, for certain consumers, equity release – which enables over-55s to release value from their property – can provide an important option to help support individuals and their families.
“As a long-term commitment made after careful consideration, consumers looking to release equity safely should always use a Council member as this ensures structured financial advice, independent legal advice as well as robust and clear product safeguards.
“Combined, these measures provide greater protection than any other later life property-based loan.”
Equity release refers to a number of products which allow people to access the cash tied up in a home so long as they are over retirement age (55).
There are two equity release options:
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This is a type of mortgage product which is secured on the home in question so long as it is the person’s main residence.
The mortgage is taken out and the person involved retains ownership of the property.
They can choose to “ring-fence” some of the value in the property as an inheritance for their family.
If this option is taken, the person involved can choose to make repayments or let the interest roll-up.
Eventually the loan amount and any accrued interest will be paid back when the person dies or moves into long-term care.
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This option allows home/mortgage owners to sell part or all of their home to a home reversion provider in return for a lump sum or regular payments.
People looking to use this option will be able to live in the home rent free until they die but they have to maintain and insure the property.
Just as with a lifetime mortgage, it will be possible to ring-fence a percentage of the property for later use such as inheritance.
The percentage the person retains will always remain the same regardless of any changes in the property’s value, unless the holder chooses to take further cash releases.
At the end of the plan, the property will be sold and the sale proceeds will be split among the remaining proportions of ownership.
The Money Advice Service details that most people who take out an equity release do so using a lifetime mortgage.
Usually with these products, a person does not have to make any repayments while they’re alive as the interest rolls up and unpaid interest is added to the loan.
This means that debt can increase quite quickly and as such careful consideration should be given before any decision is made.
When considering a lifetime mortgage, the Money Advice Service details that it’s useful to know:
- The minimum age at which a person can take out a lifetime mortgage
- The maximum percentage that can be borrowed. This is normally up to 60 percent of the value of the property
- If the interest rates are fixed or variable
- If the product has a “no negative equity guarantee”
- That the holder has the right to move to another property subject to the new property being acceptable to the product provider
- Whether they can pay none, some or all of the interest
- Whether they can withdraw the equity they’re releasing in small amounts as and when they need it or whether they have to take it as one lump sum
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