Should you use equity release to pay off debts? The pros and cons explained

by Derin Clark

Retirement should be a time to relax and enjoy life after work, but many are now finding themselves entering retirement still carrying the burden of debts. In fact, in January, equity release specialist Key found that more than one in three people are retiring with debt, which stands at an average amount of £17,460.

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With many mortgage terms lasting beyond the current state pension age of 66, along with people turning to credit cards and personal loans to get through difficult financial periods, it can be easy to see why many are entering retirement still paying off debts.

Being debt free in retirement can relieve a huge pressure off your finances. Even if you’ve had the opportunity to save a significant amount into a pension fund to help boost your retirement income, having to continue making debt repayments can put a strain on your monthly budget.

Is equity release a good option for paying off debts?

One option if you are retiring with debt is to use equity release to pay off outstanding balances. Equity release allows homeowners, usually over the age of 55, to release equity from their home as a lump sum of money. The equity release loan does not have to be repaid until the borrower moves into permanent care or dies, meaning that repayments do not have to be made during their lifetime.

On the downside, equity release will impact the inheritance left behind, plus compound interest accumulates on the loan throughout the borrower’s lifetime, meaning that a larger sum has to be paid back than was initially borrowed. Due to the long-term impact equity release can have on finances, it is advisable to speak to an independent financial adviser to ensure it is the right option for you before taking out an equity release plan.

While there are downsides to equity release, if you have debts, especially if you have a significant amount left to repay, it can be a good way of clearing debts when you retire.

Depending on 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 personal loans. And, as the equity release does not have to be repaid during your lifetime or until you move into permanent care, it allows you to start retirement not having to struggle making monthly debt repayments.

Other options for repaying debt in retirement

While equity release can be used to repay debts, there are other options for repaying debt in retirement. For example, if you still have mortgage repayments on your home, you can consider downsizing to a cheaper property that you can buy outright, paying off any outstanding mortgage and use any remaining proceeds from the sale as you wish.

Alternatively, if you have a small amount of credit card debt, you could use a 0% balance transfer credit card that will provide an interest-free period in which you can repay the debt.

An option for those with debt in various places, for example on several credit cards and loans, is to consolidate debt with a personal loan. This will help to make the debt more manageable but can also reduce the interest being paid, as you are only paying one interest on one debt rather than diffident interest on many debts.

For those who are finding it difficult to cope with debt and keep up with repayments, it is important to remember you are not alone and there is help and support available from places such as Citizen Advice or free debt charities.

More information about equity release and dealing with debt in retirement can be found on Moneyfacts.co.uk