When you retire, it is likely that your income will decrease as you stop working and lose your salary. After that, a pension is usually your main source of income. But what if you need a little extra money to make major improvements to your home or replace your car?
As long as the money you receive is enough to cover your daily expenses, you may be able to take out a loan if you are retired to cover these costs.
Is there room in your budget?
If you plan to borrow, it is important that you do so only if you have enough room in your budget for repayments.
Your monthly pension should cover all of your basic necessities such as food, utility bills, all other debts, and rent or mortgage payments (if you have not paid your mortgage yet). The money left over can be spent as you see fit, but you must have enough money if you plan to take out a loan.
When you apply, the lender should review your income to make sure you can afford the repayments. If you have enough money to cover these repayments, the lender may decide to lend you safely. Otherwise, it is unlikely that you can borrow what you need.
Before applying, it is a good idea to make calculations and determine the amount you will repay each month for the amount you want to borrow. Do not forget to include the interest rate in your calculations. You can use this loan calculator to help you solve the problem.
How much do you want to borrow?
The amount you plan to borrow will also affect the type of loan you are applying for.
Your income will determine if you can borrow and how much you can get. As a general rule, the more money you receive from your pension each month, the more you can expect to borrow.
Money donated by family or friends – no matter how often they give it to you – will not usually be included in the lender’s calculations as it is not considered an official source. In most cases, your income must come from a pension because you can prove that your cash flow will flow smoothly and reliably into your bank account.
Personal loans tend to offer lower amounts, usually less than £ 10,000, while a homeowner loan can go up to around £ 250,000.
If you have a good credit history, a personal loan could be an option because it is not guaranteed, which means your home is not at risk if you are late repayment. On the other hand, an owner loan means that you can borrow more, usually at a lower rate, as you use your home as collateral. However, should you fall behind in your repayments, the property may be repossessed.
Make sure you read the terms of any loan carefully, as there may be rules that require you to repay the loan before reaching a certain age.
For relatively modest loans, such as between £ 1,000 and £ 3,000, you can consider a 0% purchase credit card. These cards allow you to pay for an item or service but have a number of months without interest. Indeed, it is as if you were contracting a loan, but you do not pay any interest until the end of the promotional period. After that, you will pay the lender’s standard rate. It is therefore worthwhile to repay the loan during the interest free period if you can.
Release of equity
Another possible solution is the release of equity. If you own your home and have fully repaid your mortgage, you can free up some of the equity and put the money to something else.
The two options you have here are a lifetime mortgage or a home return.
Secured against your home, a life mortgage works like a regular mortgage in many ways. You borrow money from the bank according to the amount of your capital (money) that you have at home. Then you can either make monthly repayments, such as a regular mortgage, or simply let the interest grow.
You are usually allowed to allocate a portion of the value of your home loan, so you can leave money to your loved ones. Once you are dead or move to full-time day care, the loan is fully repaid – the lender can sell your home for this purpose.
With home reversion, you sell part or all of your home to a survivor. You will get money in return, sometimes in the form of monthly payments and sometimes in the form of a lump sum. In return, you will live without rent, but will have to take care of the property and keep it in good condition, making sure it is properly insured.
Once the plan is complete, your reversion provider will sell your home and distribute the cash to all parties who own it. Again, as with a lifetime mortgage, you can set aside some of the value of your home for the estate before you buy the survivor plan.
If you plan to release shares, we recommend that you first consult an independent financial advisor. They will be able to guide you through the different options and tell you if it is a good route to follow. Here you will find a list of financial advisers specializing in the publication of shares.
Think about it
It is important to remember that entering into a credit agreement is something you need to think about.
No matter what type of loan you take out, you agree to make monthly payments for a certain period of time. Any delay in these payments may damage your credit history and you may face additional charges. It’s a whole world of worry that you could do without, especially when you’re supposed to enjoy your retirement.
That’s why you should only take out a loan if you need it and are happy to make the repayments.