When you retire, it’s likely your income will drop as you stop working and lose your salary.
After this, a pension is usually your main source of income. But what if you need a bit of extra cash to make important home improvements or replace your car?
So long as the money you have coming in is enough to cover your everyday expenses, with some left over each month, you might be able to take out a loan if you’re retired to help cover these costs.
Is there room in your budget?
If you’re thinking of borrowing, it’s important that you only do so if you have the room in your budget for repayments.
Your monthly pension should cover all your essentials like food, utility bills, any other debts and rent or mortgage payments (if you haven’t paid your mortgage off yet). The money that’s left over from this can be spent however you like, but there needs to be a fair amount spare if you’re thinking of taking out a loan.
When you apply, the lender should look at your income to make sure you can afford the repayments. If you have enough coming in to cover these loan repayments, the lender may decide it’s safe to lend to you. If you don’t, it’s unlikely you’ll be able to borrow what you need.
Before you apply, it’s a good idea to do some calculations and work out just how much you’d pay back each month for the amount you want to borrow. Remember to include the interest rate in your calculations. You can use this loans calculator to help work it out.
How much do you want to borrow?
Just how much you’re thinking of borrowing will affect which type of loan you apply for too.
Your income will play a big part in whether you’re able to borrow, and how much you can get. Generally, the more money you have coming in from your pension each month, the more you can expect to be able to borrow.
Money gifted from family or friends – regardless of how often they give you it – usually won’t be included in a lender’s calculations as it’s not seen as an official source. In most cases, your income must come from a pension as this way you can prove you will have a steady and reliable flow of cash into your bank account.
Personal loans tend to offer lower sums, typically less than £15,000, whereas a homeowner loan can be for anything up to around £250,000.
If you have a good credit history, a personal loan could be an option as it is unsecured, which means your home is not at risk if you fall behind on repayments. On the other hand, a homeowner loan means you could borrow more – usually at a cheaper rate – as you use your home as security. However, if you were to fall behind with your repayments the property would be at risk of repossession.
Make sure to read the terms of any loan carefully, as some may have rules in place that mean you have to pay the loan off before you reach a certain age.
For relatively small-scale borrowing, like £1,000 to £3,000, you could consider a 0% purchase credit card. These cards allow you to pay for an item or service but have a certain number of months interest-free. Effectively, it’s like taking out a loan, but you don’t pay any interest until the promotional period ends. After this, you’ll pay the lender’s standard rate, so it’s worth clearing the loan during the interest-free period if you can.
Another alternative you could consider is equity release. If you own your home and you’ve paid off your mortgage in full or you’ve paid off quite a lot of it, you could release some of the equity and put the cash towards something else.
The two options you have here are a lifetime mortgage or a home reversion.
Secured against your home, a lifetime mortgage works like a regular mortgage in many ways. You borrow money from the bank based on the amount of equity (money) you have in your home. Then, you can either make monthly repayments like a regular mortgage or just leave the interest to grow.
You’re usually allowed to tie up some of your home’s value away from the loan so you can leave money to your loved ones. Once you have passed away, or if you move into full-time care, the entire loan is paid back – the lender may sell your house to do this.
With home reversion, you sell part of or your entire home to a reversion provider. You’ll get cash in return for this, sometimes in monthly instalments and sometimes in a lump sum. In return, you will live rent-free but have to take responsibility for looking after the property and keeping it in good shape, and making sure it’s properly insured.
Once the plan ends, your reversion provider will sell your home and split the cash up between all the parties that own parts of it. Again, like with a lifetime mortgage, you can set aside some of the value of your home to go towards inheritance before you take out the home reversion plan.
If you’re thinking about equity release, we’d recommend speaking to an independent financial advisor first. They will be able to guide you through the different options and advise you whether it’s a good route for you to take. You can find a list of financial advisors that specialise in equity release here.
Give it some careful thought
It’s important to remember that entering into any credit agreement is something you need to give careful thought to.
No matter what kind of loan you go for, you are committing to making monthly payments for a certain length of time. Falling behind on these payments can damage your credit history and you could face extra fees and charges. This is a whole world of worry that you could do without – especially when you’re supposed to be enjoying your retirement.
That’s why you should only ever take out a loan if you need it and you’re happy you’ll be able to make the repayments.
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