Over-55s no longer need to rely on unlocking equity from their home when they need to borrow larger sums of money.
There are all sorts of reasons why older people might want a significant cash boost.
It could be that they want to carry out some changes to their property, perhaps travel the world, or simply give their loved ones a helping hand for a deposit or support them with wedding costs.
Up until now, the borrowing options for people in this demographic have been fairly limited, but may be changing however, with the launch of a new lender called Free2.
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How does Free2 work?
Free2 is a new lender aimed at the over-55s, and it claims to offer something a little different to firms already operating in this market.
Borrowers aged 55-70 can borrow up to £150,000 from the firm, but crucially the loan is completely unsecured. This is where it differs sharply from the likes of equity release, where you are borrowing against what is likely the most valuable asset you own – your home.
Instead, the loan is assessed against your guaranteed pension income.
You can take out a Free2 loan over a term that suits you, ranging from five to 20 years.
And what’s more, if you die before the loan is repaid, then the debt is entirely written off, with no liability left on your estate.
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How much will it cost?
The actual interest rate, and therefore how much it will cost you to pay it off, varies depending on your circumstances and the term of the loan.
Free2 provides a loan calculator to give borrowers an indication of what sort of borrowing costs they are likely to face.
Let’s take the example of a 55-year-old borrower (who hasn’t smoked in the past 12 months), who wants to take out a £100,000 loan.
If they took the loan out over a five-year term, that would mean an interest rate of 7.4% and monthly repayments of £1,993.77.
But over a 20-year term, it would be an interest rate of 7.62%, and monthly repayments of £799.58.
Let’s be honest, that’s not exactly cheap. You could get a lower rate of interest if you re-mortgaged or went for an equity release product, for example, but the crux is that in both of those instances, your home would be involved.
There are plenty of older people who are either unwilling to use their home as collateral for that sort of borrowing, or who aren’t homeowners and don’t have that option.
Can equity release work for people with decent pension savings?
What can I afford?
One of the problems older borrowers often face is the way that lenders work out what they can afford to borrow and repay.
Perhaps understandably, these calculations focus on traditional income ‒ what you’re getting from your day job.
That’s fine if you’re still working full time but excludes an awful lot of older borrowers who are getting by just fine on their retirement income, whether that’s through an annuity or a final salary pension scheme.
Free2 argues it’s taking a different approach here, by calculating affordability through both your guaranteed pension income and regular outgoings.
You will also be required to speak to one of its ‘customer care team’ who will talk you through the loan agreement, to ensure you fully understand the terms and you are making the decision alone, rather than being pushed into it by a loved one.
Once that step is cleared, the money is sent to your nominated account within 48 hours.
How do I get the Free2 loan?
For now, it’s only available online through the lender itself. Interestingly, the firm said that it is developing an intermediary programme ‒ meaning you’ll be able to get it through a financial adviser ‒ later this year.
This is an important step, as equity release deals are only available through advisers. The fact is that when you are taking on such an enormous amount of debt ‒ particularly as you get older ‒ it may be worthwhile getting independent advice.
And by offering these loans through advisers, it means borrowers who might be interested in equity release or some other lending product, but for whom it may not be the right option, can instead be directed towards an alternative.
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Getting innovative
For too long, older borrowers have found themselves with a limited range of options when it comes to borrowing.
But the last few years have seen lenders pushed to become a little more innovative and design new products that actually meet the needs of borrowers.
A good example here is the retirement interest-only mortgage, which works a little like a regular interest-only mortgage, but with no fixed end date.
Instead, the mortgage will be repaid by the sale of the property once the last occupier dies or moves into long-term care. The availability of these deals has jumped sharply, from 38 total products in February 2019 to 79 in June this year, and from 12 providers to 19.
Often it just takes one firm to do something innovative, and others swiftly follow. So, I wouldn’t be surprised for others to take notice of Free2 and attempt to do something similar, particularly if it swiftly wins some attention.
But even if not, it’s good for the over-55s to at least have the option of borrowing more substantial sums without having to involve their property or releasing a chunk of their pension pot.
It definitely won't be the answer for everyone, but equally I'm sure that there is a subsection of older people for whom it is the right option.