Pros and Cons of Equity Release To Pay Off Debts?
Retirement needs to be a time to unwind and delight in life after work, however many are now finding themselves heading into retirement still carrying the problem of debts.
With lots of mortgage terms lasting beyond the current state pension age of 66, together with individuals relying on credit cards and individual loans to survive hard financial periods, it can be simple to see why many are entering retirement still settling financial debts.
Being financially debt-free in retirement can relieve a big pressure off your finances. Even if you’ve had the chance to save a considerable amount into a pension fund to assist enhance your retirement income, having to continue making debt payments can put pressure on your regular monthly budget.
If you are retiring with debt it is possible to use equity release to pay off outstanding balances. Equity release permits house owners, normally over the age of 55, to release equity from their home as a lump sum of cash. The equity release loan does not have to be paid back until the borrower moves into permanent care or dies, meaning that repayments do not need to be made throughout their lifetime.
On the downside, equity release will affect the inheritance left behind, plus compound interest accumulates on the loan throughout the borrower’s lifetime, meaning that a larger amount needs to be paid back than was at first borrowed. Due to the long-term impact equity release can have on finances, it is a good idea to speak to an independent financial adviser to guarantee it is the right choice for you prior to taking out an equity release plan.
While there are drawbacks to equity release, if you have debts, specifically if you have a substantial amount left to pay back, it can be a good way of clearing debts when you retire.
Depending on just how much equity you own in your home, the lump sum can be used to repay an outstanding mortgage, as well as any other outstanding debts such as credit cards and individual loans. And, as the equity release does not need to be paid back during your lifetime or till you move into long-term care, it enables you to begin retirement not needing to have a hard time making regular monthly debt repayments.
While equity release can be used to pay back debts, there are other choices for repaying debt in retirement. If you still have mortgage repayments on your house, you can think about scaling down to a less expensive home that you can purchase outright, paying off any outstanding mortgage and use any remaining proceeds from the sale as you wish.
If you have a little quantity of credit card debt, you could make use of a 0% balance transfer credit card that will offer an interest-free duration in which you can pay back the debt.
An option for those with debt in various places, for instance on numerous credit cards and loans, is to combine financial debt with an individual loan. This will help to make the debt more manageable however can likewise decrease the interest being paid, as you are just paying one interest on one financial debt rather than different interest rates on lots of financial debts.
For those who are finding it challenging to handle financial debt and keep up with payments, it is necessary to remember you are not alone and there are aid and support readily available from locations such as Citizen Advice or free debt charities.
More information about equity release and handling financial obligation in retirement can be found on Moneyfacts.co.uk
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This is a Lifetime mortgage which may reduce the value of your estate and may affect your entitlement to state benefits. To understand the features and risks ask for a Personalised illustration.
Any information contained herein is a personal opinion of the author and should not be considered to be advice of any kind. Inheritance Tax planning is not regulated by the FCA. Think carefully before securing other debts against your home. By consolidating your debts into a mortgage you may be required to pay more over the entire term than you would with your existing debt.
Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,490. Our adviser will talk through the setting up costs of a lifetime mortgage before you make any decision to proceed.