The latest Pensioner Debt Index from the Equity Release Council shows unsecured debt among homeowners aged 65 and over has risen by 16% in the last year as retirees lean on credit cards, personal loans and overdrafts to make ends meet.
The average balances owed on these types of credit across all 65+ homeowners have each risen since December 2013. Average credit card borrowing is up by almost £100 (29%) from £498 to £594 while outstanding overdrafts are up by £28 (47%) from £60 to £88. In addition, personal loan commitments have risen by £13 (2%) from £609 to £622.
As a result, overall unsecured debt from these and other sources – including payday loans, storecards and loans from family and friends – has increased by 16% per head from £1,336 in December 2013 to £1,546 in December 2014.
Credit card debt has become less common – just 19% currently owe money on a credit card, down from 23% a year ago. However, those affected have seen their average balance jump by 35% from £1,914 to £2,580 as credit card debt becomes more concentrated.
40% have used a credit card to pay everyday household bills and expenses in the last year, including 5% who do not manage to clear their balance every month.
Use of personal loans has followed a reverse pattern: average debt among those who have it has dropped by 15% from £7,956 to £6,756. However, 10% of 65+ homeowners now have a personal loan, up from 8% in December 2013.
Just 5% of over-65 homeowners have an outstanding overdraft in December 2014, down from 6% 12 months ago. However, the amount owed by those who do has more than doubled from £976 to £2,313.
“These figures suggest that older generations are not finding it any easier to get to grips with the cost of living,” said Nigel Waterson, chairman of the Equity Release Council.
“Unsecured credit is clearly helping to manage the burden of monthly bills or extra expenses. This often proves to be little more than a short-term solution as people progress into retirement.
“Lenders are understandably reluctant to extend the offer of credit once people’s work income dries up. There is also a question of sustainability when it comes to clearing debts – if people rely on a lump sum from their pension, there is a risk they will find those savings running low at a later point in life.
“The concentration of housing wealth among older generations should be an enabler for greater lending beyond the age of 65 along with the confidence that repayment obligations can be met. In the last year, the equity release market has welcomed increasingly flexible products and we await the arrival of more providers in 2015 to help older consumers lead the lifestyles they have worked for throughout their lives.”
Savings is the first course of action for homeowners aged 65+ who are in need of extra money. Specifically, 76% identify savings as their first choice for raising funds. However, 9% have no savings; 17% have less than £5,000 and 22% have less than £10,000 saved.
After dipping into savings, a bank loan is the next most popular option for raising money: 6% would take this course of action first, compared with 4% who would resort to family and 4% who would immediately turn to a credit card.
Overall, 84% of over-65 homeowners would be willing to seek a bank loan if the need arose, while 79% would use an overdraft and 76% would use a credit card. Nevertheless, many could find their options are restricted by lenders’ criteria that often require borrowers to have an income and therefore exclude many retirees on these grounds.
While none of the 65+ homeowners interviewed view it as their preferred choice, 6% would be open to borrowing money from a payday loan or doorstep lender.
With an average house price of £249,568 and an average mortgage of £57,062, the typical 65+ homeowner has £192,506 of equity in their property. However, many will have more equity available than this as 79% are mortgage-free.
Among those with a mortgage, 63% have a capital and interest repayment mortgage while more than one in three (37%) have an interest-only mortgage.
Many equity release plans in the market offer loan to values (LTVs) beginning at 20%, which – based on an average house price of £249,568 – would give the typical 65+ homeowner access to almost £50,000 (£49,914) in extra funds to help with daily living costs or one-off expenses. This sum is twice the size of the average pension pot at retirement.
Waterson said: “The arrival of the guidance guarantee on the back of the pension reforms means that 2015 will be the year when people begin to take greater stock of their available assets on the approach to retirement. These figures suggest that housing wealth will play a key role in people’s personal budget calculations.
“Long term house price growth has left many older homeowners sitting on a personal property fund that can transform their financial outlook in later life. Equity release should be considered across the board as one of a variety of options on the table, so people make the right decisions and use all their available assets to secure the most comfortable retirement possible.”
