What is a Retirement Loan? and is a senior loan / elder loan really that good? Here we will look at how an older loan differs from other types of loans on the market, who can get it and what the loan actually costs.
A retirement loan, often called a senior loan, is a type of loan that will provide retirees with extra income in old age, whether paid out as a lump sum or a monthly amount, the loan has a mortgage on the home.
How does a pensioner / senior loan work?
- You must own a home / property.
- You must offer E-rate or value-added.
A so-called retirement or retirement loan works by having a bank lend you an amount based on the value of the home you own. If you have a mortgage or other mortgage-backed debt, these are paid out by the lender you choose.
First, you must contact a bank that offers a senior / pension loan, eg Bignote Bank or a local savings bank that offers this loan.
A senior loan may seem tempting, but it is also expensive.
After a few days, you will receive a loan application that you must complete and return to the bank. Furthermore, you must send the bank a new valuation / assessment of the property you own from a certified appraiser, with the exception of:
- Apartments only need E-rates that can be booked by a real estate agent.
- If the property has been recently purchased, no new tariff is needed, as the basis for the purchase price is the property the house was purchased for.
How Expensive is a Senior Loan / Retirement Loan?
With a senior loan you can choose whether you want to pay interest or installments. You do not have to pay down the loan and you can stay in the home for the rest of your life, whether you sell or move into a retirement home.
However, this does not mean that a pension loan is “free”. The loan amount you are offered is calculated on the basis of the “interest rate”, the expected life of the borrower and the value of the home.
Interest rate and senior loans
Interest rate may be your best friend, or your worst nightmare. Einstein called the interest rate for the eighth wonder of earth, which explains how important this principle is.
Senior loans work the same way. Here, the banks take advantage of the interest-rate effect by having the amount paid to you offset over time.
The loan will grow at an ever-increasing rate until it eventually eats up the value of the home.
As you can see, the effect of the interest rate will cause the debt to gallop off as the years go by and neither repayments nor interest are served.
So what does this mean for you as a borrower?
For you as a borrower, this does not mean anything and everything. Nor for any partner or cohabitant you may have.
The debt, on the other hand, has to be settled when you either die, sell the home or move to a retirement home.
Therefore, after many years of the interest-rate effect, there will not be much left of the values of any heirs you may leave behind.
How Much Can You Get in Retirement Loans?
How much you can get is calculated based on several factors, including your age, life expectancy, value in the home minus any residual debt and where the home is located.
Example: If you are 60 years old with a home worth 3 million in a big city, you can borrow USD 710 000 or USD 4160 a month. On the other hand, if you own the same dwelling but are 75 years old, you can borrow 1.2 million or almost USD 10,000 a month.
What you can borrow is therefore calculated according to the effect of the interest rate on the bank’s failure to lose money. The banks want to prevent the loan and interest rates from growing over several years so that the loan amount eventually exceeds the value of the home.
Is it wise to take a retirement loan?
A senior / pension loan can be a way to accelerate retirement when you get older without having to pay a loan or installment. The loan may therefore be best suited for single seniors who have no plans to leave anything to the heirs or family.
However, if you have children, grandchildren or other heirs, a senior / pension loan that is not serviced can quickly eat up the value of the property so that you do not leave much value left in the inheritance.
Most who inherit use the inheritance to pay down or refinance their own debt. When this opportunity falls away, the younger generation will find it even more difficult to become debt free, and thus the spiral will continue for generations.
Alternatives to retirement loans
Retirement loans are mainly attractive to elderly people without heirs and with a paid – or low – mortgaged housing. With a senior loan, you can then receive a larger sum as a lump sum or a smaller amount paid per month as long as you live.
You do not have to pay down interest or installments if you do not want to do so.