Older homeowners could save thousands by cashing in on record low equity release interest rates and finding a cheaper deal.
Equity release has soared in popularity as homeowners look to the roof over their heads to boost their income in retirement. More than 80,000 unlocked £3.94billion of property wealth in 2018, according to the Equity Release Council.
And in the second quarter of this year alone, they raided their homes for a further £911million. Experts are urging borrowers to see if they can reduce the cost of their equity release deal by switching to a cheaper plan.
Experts are urging borrowers to see if they can reduce the cost of their equity release deal
Equity release allows those aged 55 and over to borrow against their property without having to sell it, or make repayments. Instead, the interest is rolled up over the years until the homeowner dies or goes into long-term care.
There are 300 equity release deals available today, nearly double the number a year ago and up from 48 five years ago. The cost has also plummeted, with the average interest rate below 5 per cent for the first time since records began in 2007, according to analysts Moneyfacts.
Five years ago, the average rate was 6.11 per cent compared to 4.92 per cent today. But some plans are even cheaper, with a record low rate of 2.99 per cent launched last week.
Experts say there is no reason why many existing equity release customers cannot also benefit from these low rates.
Dan Baines, commercial director of broker Age Partnership, says: ‘Taking out a lifetime mortgage doesn’t mean you have to keep hold of the same deal for a lifetime.
‘Switching can save you thousands. But many people don’t realise they can move, or are delaying it because they are worried it’s complicated.’
Hefty early repayment charges often act as a major deterrent to switching. Some plans have what are known as ‘gilt-based early repayment charges’. The level of penalty is linked to long-term savings rates called gilts — government bonds.
If rates have fallen since you took out your loan, the lender may charge you a hefty exit fee.
And as these rates vary from day to day, it means borrowers cannot know for sure how much their exit fees will cost until the day they repay the loan.
The only guarantee is that the penalty will not exceed more than 25 per cent of the initial loan. But on a £50,000 loan, this could mean an enormous £12,500 fee.
Other plans charge a fixed fee, which is calculated as a percentage of the loan. Often, these reduce over time. But even if your provider charges a hefty early exit fee, you could still save money — as Diane Rowland discovered earlier this year.
Borrowers who took out equity release plans in the late 2000s are likely to benefit most as they could be paying up to 7.5 per cent
Diane, 69, took out £43,120 in equity release loans with the same lender on her terraced home of 49 years, in Strood, Kent, between 2014 and 2017. She wanted the money to carry out some home improvements.
When Diane, who works in a garden centre, took out the loan, the interest rate was fixed at 6.5 per cent. But two months ago, her adviser offered her a review and said she was now eligible for a 3.98 per cent rate fixed for life.
By switching, Diane could save almost £60,000 over 18 years, her projected life expectancy. This is after taking into account an early repayment penalty of £6,291 and the £2,465 cost of setting up a new plan.
Diane also wanted to borrow an extra £10,000 to carry out repairs to the roof on her conservatory. Had she stayed with her original lender and borrowed the extra money, she would owe £210,526 after 18 years compared to £151,241 with her new lender.
She says: ‘Before my husband Harry passed away, we had always talked about equity release. We have no children so we thought, why not enjoy our house? Unfortunately, he died before we could take out the money, so I decided to go ahead by myself. I hope the lower interest rate will leave more equity in the home for my sister should something happen to me.’
Before you make a decision, contact an independent financial adviser to work out the maths
However, switching will not be the right decision for everyone.
Mr Baines says: ‘The numbers have to add up. It may not be worth it if you have taken out a plan in the past year, for example, when interest rates were not much higher than they are now.’
Borrowers who took out equity release plans in the late 2000s are likely to benefit most as they could be paying up to 7.5 per cent.
Modern deals are also more flexible. So called drawdown lifetime mortgages, for example, allow you take cash from your home as and when you like — rather than a lump sum. You then pay interest only on the money you have withdrawn, which could significantly reduce the cost of the loan.
Before you make a decision, contact an independent financial adviser to work out the maths. They will consider how long it will take for the savings to outweigh the costs of refinancing, taking into account your life expectancy.
It is worth asking for a review every couple of years to ensure you’re still getting the best deal.
Get a free guide to equity release
The Daily Mail has produced the complete guide to unlocking the cash from your home — written by Money Mail editor Victoria Bischoff — to help you understand everything you need to know about equity release.
To request your free copy, call 0844 571 0489* or visit mailfinance.co.uk/release.