How to pay off debt with smartER’s equity release

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Published:
7:00 a.m. September 30, 2022



Last week, the Bank of England raised base interest rates by 0.5 percentage points to 2.25%, pushing borrowing costs to their highest level since 2008.

Base interest rates are expected to continue to rise and reach 3% by the end of the year and 4.25% by August 2023, a trajectory that would translate into mortgage interest rates of at least minus 5.5%.

Economists argue that a policy of gradually raising interest rates remains the most powerful weapon to combat runaway inflation and, as Bank of England projections suggest that CPI inflation will reach 13.3% by November, we should get used to higher borrowing costs.

Soaring inflation has a particularly detrimental impact on people living on fixed incomes, an unenviable position that many people on the cusp of retirement can easily contemplate. A significant number of people who may have recently retired are experiencing their first bitter taste of the damage inflation can inflict on their finances.

Retiring with large and costly debt is often seen as a mistake because every penny of debt you have to pay off reduces your retirement income. However, it’s also true that while settling all your debts at once can bring a huge sense of relief, if such an action decimates your retirement kitty, you’re unlikely to enjoy a carefree retirement. . It follows that it makes a lot of sense to prioritize the types of debt you need to reduce before taking steps to fix it.

Ideally, retirees would have paid off their debts years before they stopped working for the last time. But in reality, many end up with a large residual balance on their mortgage, plus perhaps an outstanding car loan and a handful of credit card debt. As interest rates continue to climb, paying off costly debt is a priority for those planning to retire soon.

Credit card interest rates currently hover around 20%, meaning borrowers pay £1 for every £5 they borrow. Paying such high interest rates would have a noticeable impact on your finances at any time, let alone when you plan to retire.

Similarly, following a relatively recent explosion in the means of financing a new car (personal contract rental; personal contract purchase; personal loan; hire-purchase; balloon hire-purchase, etc.), check the level of interest that you’re currently carrying pay and figuring out if you need a big car in retirement could save you a small fortune.

Paying off a mortgage before retirement is a common and understandable goal among future retirees. People who have achieved this (and it’s a feat) note how much more relaxed they feel: some claim it has improved their quality of life – an observation that should not be ignored, but given due consideration. into account in any decision to permanently abandon the mortgage.

Debt consolidation, whereby all of an individual’s debts, including loans, credit cards, mortgages, and overdrafts, are merged into a single loan can be a smart strategy for people on the cusp of retirement,” notes Mark Gregory, managing director of Equity Release Supermarket.

“In addition, people aged 55 and over who own their own home may be able to free up funds from their property with which to pay off all of their outstanding debt,” Gregory adds.

For many, the growing appeal of capital release is due to one particularly attractive feature: senior homeowners can release some of their property value into tax-free funds without having to make regular repayments if they wish. wish. The most popular form of capital release is using a “life mortgage” to withdraw funds from the home. Interest is added to the mortgage, with the total paid off either when you die or when you enter a long-term care facility.

Earlier this year, Equity Release Supermarket launched smartER, a unique search engine that matches equity release offers in real time with user needs. The platform is completely free and no credit check is required.

“smartER has been a huge success,” says Mark Gregory, “and it’s perhaps remarkable that one of the most popular applications for products like lifetime mortgages is debt consolidation.

“It’s very easy to use: just enter your details, click on your plan requirements and smartER will search the entire market in real time and show you a range of options depending on your personal situation.

“A shortlist will detail each plan and show exactly how much you could borrow. You can also refine your results using a range of filters.

As interest rates rise in an attempt to reduce inflation, older homeowners with outstanding loans may consider checking out smartER, a particularly smart move.

For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.

This column is for general information only and should not be considered financial advice for individuals. Consult your professional advisor.

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