Equity release figures show debt crisis among retired

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couple argue fight husband wife married upset hold hand on head dv702088 Digital Vision Worried Man Standing in his Apartment



New figures have revealed a worrying trend in how retirees are using equity release: there has been a surge in the number of people taking money out of their property in order to clear debts - including loans and credit cards.

The figures come from Key Retirement, which says that almost £341 million was 'released' in the first three months of 2013 - and that an astonishing 31% of customers were using this to clear unsecured borrowing: mainly personal loans and credit cards.

On top of that, 23% used at least some of their money to clear their mortgage - which means that more than half of people turning to this kind of product are doing so because even after retirement they are carrying unmanageable debts. These figures have spiked alarmingly too. At the same point last year, 26% of customers were clearing unsecured debt, and 21% were clearing a mortgage.

Why is this a concern?

This is yet another sign that older people are increasingly facing a debt crisis. Research from Prudential has shown that one in six people will retire with debts. The majority of this is credit card debt - carried by 56% of them, while the rest is mortgage debt.

The problem is that once they have retired, they are forced to live off a fixed income, so they can ill-afford to be spending an average of £220 a month paying off debt. Some take a lump sum from their pension in order to pay off what they owe, but this leaves them paying the price of a lower income for the rest of their life.

These new figures show that even once the original debts are cleared, older people are falling into debt a second time. The average age of an equity release customer was 71, so this isn't debt they carried into retirement: it's borrowing they are building up because their retirement income is falling well below their requirements.

Dean Mirfin, technical director at Key Retirement said: "Debt in retirement is a growing issue, with large numbers of customers using money to clear mortgages as well as credit card debts and loans. That highlights a real need for lenders - including equity release providers - to develop solutions to help."
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Doesn't equity release mean we don't have to worry?

Equity release is clearly an option for older people, who can use some of the growing value in their property to get them out of a borrowing hole elsewhere in their finances. However, it comes with a cost - which in some cases can be very significant.

The cost depends on the type of scheme you opt for. If you take a lifetime mortgage, you are essentially borrowing against the value of your home. Instead of having to pay interest on the money you borrow, it rolls up, so that it becomes payable after your death - when the property is sold.

The longer you live, the more interest is payable, and while regulations mean that the interest can no longer amount to more than the value of your home, it can wipe out the majority of its value. Which? warns that 20 years after you take a lifetime mortgage, you can end up owing more than three times the sum you borrowed.

If you opt for a home reversion scheme, you sell part of the property to a company, and after you die, when the property is sold, they get a percentage of the sale price. The risk with these, Which? warns, is that some of these schemes will take more than 70% of the value of your home in return for giving you 20% of its value.

Paying off unsecured debt, therefore, comes at the cost of losing a large chunk of the equity you have built up in your home. For those who have discussed it with their family, and decided this is the most sensible route, it may be a godsend. But for those who act out of desperation, and on the quiet, there's a real risk that after their death their family is in for a horrible shock - when they realise that most of the value in their family home has been eaten up paying off credit card debts.

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