Growing numbers of over-55s are borrowing into retirement, a trend which is expected to continue as the economy fully opens up and consumer confidence grows.
This age group is expected to borrow £10bn more in 2021, according to new research from and economics consultancy, the Centre for Economic and Business Research (CEBR) and equity release lender more2life, with the total amount of debt predicted to reach £236 billion, up from £226 billion in 2020. This is thought to be partly due to more people making larger purchases such as cars and property following the relaxation of lockdown measures and borrowing to fund these purchases.
Many over-55s still have outstanding mortgages, with estimates suggesting that in 2021, the average 55-64 year-old household with mortgage debt will have around £106,100 left to pay, up from £90,000 last year. Separate research conducted by the Equity Release Council, the trade body for the equity release sector, found that nearly two in five (38%) homeowners in their sixties agree it is becoming more common to have a mortgage in later life, while 41% agree it is becoming more acceptable.
One in three (32%) homeowners agree taking out a mortgage in later life can provide money to improve their lifestyle, while 31% agree it can provide a means to help family members. A spokesman for the Equity Release Council said: “Those who own their own homes are borrowing larger sums for longer and building considerable equity in the process. Perceptions of debt in later life are changing as a result, and property wealth is transitioning from having been an ‘emergency fund’ to becoming an enabler of personal and family life ambitions and financial goals.”
If you are planning to borrow in later life, it’s important to get to grips with the various options that are available to you, and to fully understand the pros and cons of each.
These include retirement interest-only mortgages, which enable homeowners aged 55 or above to make monthly interest mortgage payments without having to plan how they’ll repay the mortgage capital at the end of the mortgage term. The mortgage simply runs until the property is sold, or the homeowner dies or moves into long-term care. It is only at this point the capital must be repaid.
If you don’t think your retirement income will be enough to cover monthly interest payments, equity release, where you unlock some of your property wealth, is another option. With equity release there are no payments to make as interest rolls up over time and only has to be repaid, along with the capital you’ve released, when you die or go into long-term care.
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A spokesman for financial website Moneyfacts.co.uk said; “This loan can often be taken as drawdown, meaning that the borrower only takes the money that is needed, allowing them to take more at a later date if required. The initial drawdown can be used to repay debts, including any outstanding mortgage left on the property.”
Bear in mind that as the interest is compounded – which essentially means each year it is calculated based on the amount you’ve borrowed plus the interest you’ve already been charged, the total that you owe can grow fast.
It’s therefore vital to let your family know if you’re thinking about releasing equity from your home, as it will affect the value of any inheritance you’d planned to leave, and could also have an impact on your eligibility for certain means-tested benefits.
Andrew Morris, senior equity release adviser at Age Partnership, which last year surveyed more than 1,000 over 55s to find out more about the role of family in our finances, said: “As part of our study we asked the general public, if they were considering equity release, would they discuss it with their friends and family? An overwhelming 61% said yes they would.”
“This is extremely positive, as equity release is a lifelong commitment and can impact on family members later down the line. We always encourage anyone considering equity release to involve their family as early on in the process as possible.”
If you don’t want to borrow into retirement, then one way you might be able to clear any existing debts is by downsizing. The Moneyfacts.co.uk spokesman said: “Homeowners can use the sale of their current property to buy a less expensive home, which enables them to free-up additional money that can be used to pay-off debts. As well as this, moving to a smaller home will often reduce monthly outgoings as the property will normally be cheaper to maintain than their previous home.”