Solving the interest only timebomb

There has been a rather alarming jump in the number of people retiring with serious debts in the last year. According to research from the Prudential’s Class of 2018, ‘Debts owed by those retiring in 2018 have risen by 40% compared with those who retired last year.’ A 40% spike in a single year is certainly noteworthy, but there’s a clear solution that is staring most retirees in the face.

Related topics:  Later Life
Andrea Rozario
28th February 2018
Andrea Rozario Bower Retirement
"I cannot imagine that ‘engagement levels’ will rapidly change, but we need to keep banging that timebomb drum like our lives depend on it "

For most people, entering retirement with lingering debts is not part of the plan, but for millions of retirees the fact is that carrying debt into retirement will be the reality. Again, according to research from the Prudential, ‘Paying off debts in retirement will take an average of three-and-a-half years and cost £285 a month.’ Hardly the perfect start to retirement - taking over three years to be debt-free - but property wealth and products within the equity release stable are proving to be a great way to provide another solution. This is still debt but it does allow an option to not make monthly repayments, therefore tapping into property wealth and improving immediate disposable income, but obviously this debt will increase over the years, so there must be clarity on the options.

Recent data has shown that despite retirees carrying more debt into their post-work life, the over-65s are also sitting on the most property wealth of any other age group - a staggering £1.1 trillion nationwide. In reality, the average retiring property owner has far more housing equity than any lingering debts, and options like equity release or downsizing are therefore becoming not only just appealing, but also logical. In fact, over-65 property owners have seen their property wealth increase at a very strong rate in the past 8 years - over 40% according to some data - so issues with debt need to be considered carefully and all options considered.

This wiping the slate clean could be easy enough for debts like credit cards, something that some 53% of indebted retirees currently hold, but the more serious issue is overhanging mortgage debt. The Prudential’s data claims that 38% of retirees with debts have mortgages outstanding - and this is far more serious. What’s more, many of these mortgages will be interest only and the ‘timebomb’ is now going off.

There are supposedly over 1.3m homeowners with an interest only shortfall, with the average levelling out at a whopping £71,000. Far more than even the most free-spending credit card binger. These debts are serious and unfortunately, but somewhat predictably, people seem to be refusing to heed the warnings of the regulator and the press, both of whom have banged this drum almost incessantly in recent years. Perhaps it is human nature to delay debt repayment, but when the result could be losing ones home it is incumbent on us to keep on banging.

Now although the real difficult times will come in the next two maturity ‘peaks’ in 2027-2028 and 2032 when poorer homeowners will have to make repayment, everyone needs to know their options now. Yes, the regulator is sending out letters to all interest only customers, but they themselves admit that ‘customer engagement levels are low’ - which is hardly a surprise!

I cannot imagine that ‘engagement levels’ will rapidly change, but we need to keep banging that timebomb drum like our lives depend on it - as for many that is the sad reality. Of course, downsizing is an option due to the property wealth the elderly hold, but who wants to sell up and move somewhere else in old age especially as there is precious little suitable property available. Time and again research shows that homeowners overwhelmingly want to stay put, so equity release will always be an interesting alternative. And with the interest only crisis soon to be in full flow I am certain many more people will be turning to the lifetime mortgage and lending in retirement.

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