News, Culture & Society

Equity release borrowers from 15 years ago are paying TWICE as much interest as today 

More than half a million older borrowers have accessed cash from their homes by taking out equity release mortgages in the last two decades, new data shows. 

However, some say they regret their decision – and those that took out plans as little as 8 years ago will be paying twice as much interest proportionally as they would if they had taken one out today. 

A new report by equity release provider Key found that 557,000 Britons have used equity release in the past 20 years, releasing more than £32billion of cash. 

Those who took out equity release plans eight years ago will find their interest payments are significantly higher than what they would pay if they took one out today

Equity release is a type of mortgage which effectively advances part of the value of a property to a homeowner over the age of 55, while they are still living it.

The balance, plus interest, is then paid off by the sale of the house when the owner dies or moves into care.

The sector has exploded in the last couple of years as rates have come down and borrowers have been given the option of paying interest as they go, rather than accumulating compound interest over many years as they had to in the past. 

There are 769 products available on the market today, three times the amount in the first three months of 2019. 

Equity release: How is the money used?  

Home renovations 56%

Paying off existing mortgage 26%

Paying off unsecured debts 25%

Holiday 20%

Improving income 19%

Gift for children 16%

Living expenses 12%

Garden renovations 11% 

 Source: Key

The average value of homes that equity release plans are taken out on is currently £366,660 according to Key: a figure that has increased 57 per cent over the past 12 years.

Nearly a third of those who have used equity release since 2001 live in London or the South East, accounting for more than £14billion of the total money released.

While 67 per cent of customers in the Key survey said equity release had made a ‘major contribution’ to their quality of life, some said they had regrets about taking out a plan.

Of the respondents, 21 per cent commented that there were ‘no alternatives’ when they took out equity release, while 15 per cent regretted that it reduced the inheritance they could leave to their family. 

House price increases can mitigate some of the lost inheritance, as the borrowers’ next of kin get to keep any additional equity built up when they sell. 

Steve Wilkie, executive chairman of later life mortgage broker Responsible Life, says:

‘Some borrowers in a weaker financial position regret not being able to leave as much inheritance to loved ones, but high house price growth, which has seen the average UK home increase in value by 47 per cent in the past decade, means many can actually afford to release enough to live on and still leave a valuable inheritance to loved ones.

‘For those less well off, helping children and grandchildren sooner can offset the lack of a big lump sum inheritance later on.’

Twelve per cent said they wished they could have borrowed more, while 12 per cent said they wished they didn’t have to borrow in later life.

Today’s borrowers getting a much better deal than those who released equity just eight years ago

As the equity release market has grown, interest rates have dropped considerably.

The earliest interest rate recorded by Key’s report was 5.4 per cent in 2003, however this rose to a high of 6.8 per cent in 2005 and again in 2012 and 2013.

Today, the typical rate is 3.3 per cent, according to Key, so buyers will be paying around half the amount of interest proportionally that they would have eight years ago.

Equity release broker Age Partnership has compiled the current best buys for us below.  

BEST RATES ON EQUITY RELEASE 
Provider  Plan name  AER (APR)  Minimum property value  Partial repayments?  Fee  Cashback
Pure Retirement Classic Flexible Lump Sum 2  2.72% (2.86%)  £10,000  Yes  £500  £0
Pure Retirement  Sovereign Lump Sum A 2.73% (2.92%)  £70,000  Yes  £895  £600 
Pure Retirement  Classic Flexible Lump Sum 1  2.76% (2.85%)  £100,000  Yes  £0  £0 
Aviva  Lifestyle Flexible Option  2.77% (2.90%)  £75,000  Yes  £5  £0 
Canada Life  Lifestyle Lite  2.87% (2.91%)  £70,000  No  £650  £0 
Source: Age Partnership. Data based on a 71 year old borrower, with a property value of £350k releasing a £65k lump sum

Switching plans can often save borrowers money, even if they have to pay exit fees – but an investigation by This is Money’s sister title, Money Mail found that only one in 100 borrowers do. 

Even in the last two years, rates have come down significantly, highlighting the speed of change in the market.  

Katie Brain, mortgage expert at Defaqto, says: ‘The average interest rate currently for a borrower at age 65 is 4.12 per cent, and the lowest rate is 2.75 per cent – compared to an average 5 per cent and a lowest rate of 3.40 per cent two years ago.

‘It may be a good time to consider releasing equity from a property as interest rates for equity release are very low.’  

More flexible options 

Historically, equity release had a controversial reputation. This was partly because in the early days there was no option to make repayments until after the borrower had died.

This meant the relatives of some borrowers were left with hefty interest sums – or even in negative equity – as the interest had mounted up over many years and then additional interest had been charged on it.

However, there is increasingly the option to pay interest off as they go, or to ‘draw down’ from their pot gradually and only pay interest on what they have taken out.  

Drawing down: Some equity release plans now allow borrowers to take money out as and when they need it, rather than in one lump sum, which reduces the amount of interest they pay

Drawing down: Some equity release plans now allow borrowers to take money out as and when they need it, rather than in one lump sum, which reduces the amount of interest they pay

Key says that nearly half of all equity release products now offer ad hoc, penalty-free repayments, while 44 per cent allow the customer to make interest repayments. 

‘The drawdown facility can be a popular option as it means the borrower can draw funds down as and when they need to, so interest is not charged until that point,’ says Brain. ‘However the interest rates are slightly higher to include this facility.’  

The sector is now regulated by the FCA, and providers can also voluntarily join the Equity Release Council to sign up to additional safeguards.

Products approved by the Equity Release Council all come with ‘no negative equity guarantees,’ and guarantee borrowers the right to move home, provided their new property meets lending criteria.

Flexible: Key outlines some of the facilities that today's equity release plans have

Flexible: Key outlines some of the facilities that today’s equity release plans have

Jim Boyd of the Equity Release Council says: ‘The consumer experience of equity release has been transformed in recent years. 

‘Alongside major brands joining the market, new product developments have built on the robust consumer safeguards first established back in 1991.

‘These safeguards mean every customer of a council member has been protected from the cost of ever falling into negative equity and has benefitted from a fixed or capped interest rate for life.’ 

Key says that 46 per cent offer downsizing protection – which allows borrowers to move to a smaller home and repay their plan in full without incurring any early repayment charges. 

Andy Shaw, director of mortgage broker SPF Private Clients, says that, before being drawn in by a low headline interest rate, borrowers should look for a plan that gives them ‘options, not obligations’. 

This data from Key shows interest rates on new equity release plans over time

This data from Key shows interest rates on new equity release plans over time 

‘Interest rates will always be important when it comes to equity release and we’re fortunate to be at a point in that particular cycle where rates are very low. That said, factors beyond the headline interest rate are often just as important,’ he says. 

‘The option to service interest (or even reduce the debt) via a penalty-free overpayment facility can be critical, as can ensuring that appropriate waivers from early repayment charges are in place.

‘Portability is standard, but considering down-sizing protection and also the duration of any ERCs can also help tailor a solution to a borrower’s known future plans.’ 

But some say it should still be last resort, especially if the borrower would be taking out a traditional interest roll-up plan. 

Brain adds: ‘There are several options for later life lending, equity release should really be the last option because interest is rolled up, and therefore the debt can increase quickly. 

‘For example; a loan of £50,000 at an interest rate of 2.75 per cent the total debt would be £86,021 after 20 years.’

Alternatives include a regular remortgage and a retirement interest-only mortgage.

Another concern is the fees charged by equity release lenders for paperwork when borrowers want to make changes to their plans. 

For example, Money Mail’s investigation found that one major lender charged £600 in admin costs. 

The cost is also compounded because equity release decisions can only be made after talking to an independent adviser — which can add thousands of pounds to the bill.  

Although the equity release market is diversifying, a separate study suggests that there are still negative attitudes and a lack of information surrounding the concept.

Independent mortgage broker, Boon Brokers, surveyed 1,000 homeowners aged over 55 for their views on equity release. 

Fifty-seven per cent were adamant they would never take out an equity release product on their home – yet two thirds (67 per cent) admitted they weren’t really clear what it was.

One in ten said they were worried about negative equity, 22 thought they would no longer own their home (which is not the case with the majority of equity release products) and one in five said they had been put off by ‘horror stories’ involving other borrowers.

Gerard Boon, founder and partner at Boon Brokers, said: ‘This research shows there’s a very high level of misunderstanding about modern equity release products.

‘People automatically dismiss it due to its reputation and admittedly, in the past, there were products which weren’t fit for purpose and which were mis-sold.

‘But now the industry is regulated and the products are much more refined, equity release can be really useful for homeowners in all kinds of situations.

‘It’s important to choose a product which is covered by the Equity Release Council and getting good advice is vital – and in fact a legal requirement – so the terms are properly understood.’  

Read more at DailyMail.co.uk