How to pay off debt with equity release from smartER

7:00 am September 30, 2022

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

Base interest rates are forecast to continue rising, reaching 3% by year-end and 4.25% by August 2023, a move that would result in mortgage rates of at least 5.5%.

Economists claim that a policy of gradually rising interest rates remains the most effective weapon in combating runaway inflation, and with Bank of England forecasts suggesting CPI inflation will hit 13.3% by November, we should get used to higher borrowing costs .

Rising inflation is particularly detrimental to those living on fixed incomes, an unenviable position that many people approaching retirement find it easy to imagine. A significant number of people who may have recently retired are experiencing their first bitter taste of the damage inflation can do to their finances.

Retiring with large, expensive debt is often seen as a mistake, since every penny of debt you have to pay off reduces your retirement income. However, it’s also true that while there can be a great sense of relief to pay off all of your debt in one fell swoop, if such a move depletes your retirement pot, chances are you won’t enjoy a worry-free retirement. It follows that it makes tremendous sense to prioritize the types of debt you need to reduce before taking action to address it.

Ideally, retirees would have paid off their debts years before they left work. But the reality is that many are left with a sizeable balance on their mortgage, plus perhaps an outstanding car loan and a handful of credit card debt. As interest rates continue to rise, paying off expensive debt is a priority for those planning to retire soon.

Credit card interest rates are currently 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 point, let alone when you are planning to retire.

Similarly, after a relatively recent explosion in funds available to finance a new car (rent with personal contract, purchase with personal contract, personal loan, installment purchase, balloon hire purchase, etc.), you should review the level of your current interest in paying and considering whether you need a big car when you retire could save you a small fortune.

Paying off a mortgage before retirement is a common and understandable goal among prospective retirees. People who have achieved this (and it’s a success) find how much more relaxed they feel: some claim it’s improved their quality of life – an observation that shouldn’t be ignored but should be considered in any decision to make the mortgage final abolished should be given due consideration.

Debt consolidation, which combines all of a person’s debts, including loans, credit cards, mortgages, and overdrafts, into a single loan, can be a sensible strategy for people nearing retirement,” notes Mark Gregory, managing director of Equity Release supermarket.

“In addition, individuals aged 55 and older who own their own home may be able to free up funds from their property with which to pay off any outstanding debt,” adds Mr. Gregory.

For many, the growing appeal of equity release stems from a particularly appealing feature: Senior homeowners can release some of their property’s value into tax-free funds without having to make regular repayments if they choose. The most popular form of equity release uses a “mortgage for life” to withdraw funds from the home. Interest is added to the mortgage, with the full amount being paid out either on your death or when you are placed in long-term care.

Earlier this year, Equity Release Supermarket launched smartER, a unique search engine that matches real-time equity release deals to user requirements. The platform is completely free to use and no credit checks are required.

“smartER has been a tremendous success,” says Mark Gregory, “and it’s perhaps worth noting that one of the most popular uses for products like lifetime mortgages is in debt consolidation.

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

“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 surge in an attempt to stem inflation, older homeowners with outstanding loans might consider a SmartER check as an especially 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 relied upon as financial advice to any individual. Contact your specialist advisor.

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