Equity release rates have plummeted to their lowest ever levels as demand for later life finance grows, research has revealed.
But homeowners who are recommended a lifetime mortgage, where interest rolls up into the loan, could actually save tens of thousands of pounds by refusing equity release and taking a retirement interest-only mortgage.
Last year This is Money revealed that advisers may be more inclined to recommend that borrowers take a lifetime mortgage over a normal mortgage – partly because there is no risk that borrowers could lose their home but also because they earn 10 times the commission.
Now analysis by Defaqto has found that the average equity release rate now stands at 4.55 per cent, compared to an average of 5.4 per cent just 18 months ago.
The lowest rate on the market is now just 2.84 per cent – on offer from More to Life – making it cheaper than ever to borrow against your home after you retire.
But the same research also uncovered evidence that borrowers who took a retirement interest-only mortgage would be charged thousands of pounds less in interest over the term of the deal – due to the fact that interest is paid monthly rather than building up and compounding your debt.
Average rates now stand at 4.55 per cent, compared to 5.4 per cent just 18 months ago
If, for example, a borrower aged 65 took a £50,000 equity release loan at a typical rate of 2.99 per cent, then by the age of 85 they would owe their lender £90,130, and will have made no monthly payments in that time.
If the home was worth £250,000 to start with and house prices over that period had increased on average by 2.5 per cent per year, the debt would represent 22 per cent of the equity in the property, leaving the owner with 78 per cent of the house value.
However if that same borrower instead took a slightly more expensive retirement interest-only loan of the same size and term length at a typical 3.19 per cent, they would actually end up paying £8,230 less over the course of the loan than if they’d used equity release, despite paying a higher interest rate.
This is because they would be paying the interest off each month – around £133 – thus not giving it the chance to compound.
If house prices over that period had increased on average by 2.5 per cent per year, the debt would represent 12.2 per cent of the equity in the property, leaving the owner with 87.8 per cent of the house value.
If you compared retirement interest-only rates with like-for-like equity release rates, then the difference would be even more dramatic.
Over 20 years at 2.99 per cent, a retirement interest-only borrower would have paid a total interest of £29,000, bringing their total cost up to £79,900, some £10,230 less than using an equity release loan at the same rate.
And the longer the length of the loan, the more this difference is pronounced.
A £50,000 lifetime mortgage over 30 years at 2.99 per cent would result in a total outstanding loan of £122,475 – some £72,475 more than the original £50,000 loan.
Even if an equity release rate is lower it can end up costing more than a retirement interest-only mortgage over the lifetime of the loan thanks to the compounding interest
Defaqto’s Brian Brown said: ‘For those in later life who own their own home but need cash, borrowing money is not easy. Most standard loans and credit deals are not available to pensioners, leaving them with little choice but to release equity from their home.
‘Releasing equity from your home is a big decision with ramifications for the rest of your life; you should take advice from an independent and qualified professional before making any decisions.’
The research comes as an estimated £5billion of cash was released from peoples’ homes in 2019 as more and more older homeowners looked to help their children onto the property ladder, supplement pension income or plug an endowment shortfall.
Last year This is Money revealed that the take-up of retirement interest-only mortgages has struggled, with just 112 sold in the 12 months since they were first introduced in May 2018.
After further investigation, in November we revealed that as of July just 660 retirement interest-only deals had been sold.
Lifetime mortgages, the most popular type of equity release, still dominate the later life lending scene as a result.
The lowest lifetime mortgage rate available today is 2.84 per cent from More 2 Life, at age 65, according to Defaqto.
Retirement interest-only interest rates have also dropped to their lowest ever levels, with the lowest rate available today is 2.79 per cent from Marsden Building Society.
Like mortgages, equity release loans are offered up to set loan-to-values – the size of the loan as a percentage of your property’s value.
However, equity release is offered only up to a far lower loan-to-value than a traditional mortgage. This is because interest is not paid off on the loan and instead rolls up, meaning the amount to be repaid increases over time.
Equity release providers should guarantee that you will never have to repay more than the value of your property.
This equity release calculator shows how much people can typically borrow. To download your free equity release guide click here.
Is equity release as cheap as it seems?
While equity release rates are much lower than they have been historically, there are certain other factors to take into consideration.
The most important thing to remember is that the interest on the loan has ‘rolled up’, meaning it has been added to the original loan.
There is also a compounding effect, meaning that you’re not just paying interest on the loan, but interest on the interest that you’ve already paid on the loan.
If the loan is taken over a long enough period of time, this can reach a point where the money owed starts growing exponentially.
Just because this money isn’t coming out of your pocket each month doesn’t mean you’re not spending it – it’s effectively coming out of the equity in your home.
You can read our comprehensive guide to equity release by clicking here.
You can also use our compound interest calculator to see how much you could end up owing by taking out equity release. The calculator is designed to calculate savings interest, but can also be used to calculate the interest on a loan.
To use the calculator, if you’re considering taking a lump sum, just use the ‘lump sum’ option, while ‘monthly saving’ can be used to calculate how much you would owe with a drawdown plan.
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