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19 Jul 2020

Over-55s offered unsecured loans of up to £150,000: do the numbers add up?

New provider offers loans for retirees based on guaranteed pension income

People over the age of 55 can now apply for personal loans of up to £150,000 without putting their home at risk. But are they really an affordable way of raising cash in retirement?

The new financial services brand free2 is offering unsecured loans to older homeowners using their guaranteed pension income as security.

Here, Which? explains how the loans will work, what they cost and how they compare with other methods of raising cash in retirement.

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Free2 loans for over-55s

Free2 says its new loans are 'unlike anything else on the market'.

They allow homeowners aged over 55 to raise money without using their property as collateral, spending their savings or accessing their pension pot.

Instead, they use guaranteed pension income from annuities or final salary pensions as security.

How do the loans work?

Homeowners aged 55 to 70 can take out personal loans from £5,000 to £150,000 with a term of five to 20 years.

Loans must be repaid by the borrower's 75th birthday. So if you're 55 you can borrow for up to 20 years, but if you're 70 you'll only be able to borrow for five years.

The loans come with a fixed rate of interest for the whole term and if you die during the term the debt will be written off.

Free2 says its loans can be used for a variety of reasons, including raising money to help a child buy their own house, to look after parents in later lifeor renovate a property,

Do the numbers add up?

The rate you'll pay on a free2 loan is influenced by your age, the term you're borrowing for and whether or not you're a smoker.

Which? modelled a series of scenarios based around borrowing £50,000 with a free2 loan.

We searched for loans for borrowers aged 55, 60, 65 and 70 and found that representative APRs increased by around 0.2% with each age bracket.

We also discovered that the gap in cost between a non-smoker and frequent smoker ranged from around 0.5% (age 55) to around 1.5% (age 65 or 70).

How much does it cost to borrow £50,000?

Age 55

TermMonthly repayment (non-smoker)APR (non-smoker)Monthly repayment (frequent smoker)APR (frequent smoker)
5 years£1,0007.7%£1,0118.2%
10 years£5907.7%£6058.2%
15 years£4607.6%£4788.3%
20 years£4017.7%£4248.5%

Age 60

TermMonthly repayment (non-smoker)APR (non-smoker)Monthly repayment (frequent smoker)APR (frequent smoker)
5 years£1,0057.9%£1,0258.8%
10 years£5967.9%£6218.9%
15 years£4687.9%£4989.1%

Age 65

TermMonthly repayment (non-smoker)APR (non-smoker)Monthly repayment (frequent smoker)APR (frequent smoker)
5 years£1,0118.2%£1,0409.5%
10 years£6068.3%£6439.8%

Age 70

TermMonthly repayment (non-smoker)APR (non-smoker)Monthly repayment (smoker)APR (frequent smoker)
5 years£1,0218.6%£1,05310%

What are the alternatives?

Free2 says its product fills a gap in the market, as there are few personal loans available to over-55s looking to borrow more than £35,000.

With a lack of equivalent products available, it's difficult to compare rates - but the lowest rates on a £50,000 loan from free2 are around 7.6% for a 55-year-old non-smoker - so while these loans are innovative, they come with a significant cost.

Before signing up to a loan, think about alternative ways you might raise the money and consider taking professional financial advice.

Using your savings

If you have significant savings, consider whether using these rather than taking on additional debt might be a prudent move.

Using your own savings will save you thousands in interest payments compared to a loan, but there are drawbacks.

Accessing your savings could leave you without a financial back-up plan.

In addition, you'll lose out on investment growth and may face penalties when unlocking cash in fixed-term accounts.

Unlock your pension tax-free

People aged 55 can withdraw up to 25% of their pension savings tax-free, potentially unlocking a large sum for use in retirement.

Much like your savings, however, accessing your pension early cuts down on your pot for the future and also means you'll lose out on tax-free gains.

Equity release

Equity release plans allow you to borrow money against the value of your home.

Lifetime mortgages enable you to take a lump sum without paying ongoing interest. The cost of the loan is rolled up and is repayable after death or if you go into care.

Alternatively, retirement interest-only mortgages allow you to borrow money against your home and just pay the interest each month.

Equity release can be very expensive and significantly cut the value of your estate.

Raising money in retirement: where to get advice

If you're thinking of accessing your pension, taking out a loan or opting for an equity release product, it's important to take independent financial advice first.

The Money Advice Service provides a directory of regulated financial advisers who specialise in retirement and pensions advice.

If you're thinking about equity release or a retirement interest-only mortgage, consider advice from the debt charity StepChange or speak to a whole-of-market mortgage broker.