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Mark Gregory, Founder and CEO at Equity Release Supermarket
www.equityreleasesupermarket.com
Tel: 0800 678 5955
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Question
Interest rates – how do I know I am getting a good deal?
What sort of interest rate would you describe as ‘competitive’ in the equity release market? I have noticed there are deals around for between nearly 4% and up to 6%. My instincts tell me I should automatically consider only the 4% deals, but would appreciate some guidance on how to tell I am getting value for my money.
Answer
The interest rates that are applied to lifetime mortgages do vary greatly and that’s simply because they are designed to meet very different needs of homeowners. That said, a significant number of plans are now available offering rates under 4%, with some now breaking through the sub 3% MER level.
The interest rate offered by a lender will be associated with the risk in the amount they are lending and the features that are included within the plan. Therefore, the higher the loan-to-value (LTV – the proportion of your loan compared to the property value), the higher the interest rate will usually be.
Conversely, if you borrow a smaller percentage of your property value, the risk to the lender is lower, and here you can achieve rates at the cheaper end of the market. For instance, Pure Retirement’s ‘Classic Super Lite’ today* has a rate of 2.94% MER (3.09% representative APR). MER is the interest rate payable if you were to repay the interest accruing on a lifetime mortgage every month for the duration of the plan. But this comes with lower LTVs, so a single homeowner age 60 would only be able to borrow up to a maximum of 11% of their property value to receive this rate.
Some lenders now give you the opportunity of choosing whether to pay an application fee, or not. Again, this can influence the rate slightly. In such circumstances, by choosing to pay an application fee, will lower your rate slightly, compared to going ‘fee free’.
Therefore, taking the lowest rate doesn’t always make it the best plan for your individual circumstances. There are a host of features and benefits that can be built into lifetime mortgages now, which can provide greater flexibility should your circumstances change in the future – downsizing protection, three-year compassionate early repayment charges, monthly repayments etc.
Lifetime mortgage now come with so many options and features that there is no simple answer to the question, ‘what is a competitive interest rate?’. The right plan for you is one that meets your needs both now and in the future, and the best way to find that is to speak to an expert adviser at Equity Release Supermarket.
*rates correct as at 27 August 2019.
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Question
How do early repayment charges work?
I have been searching online for different equity release deals and noticed some have ‘no early repayment charges’. But, surely, the point of equity release is that the loan is not repaid until the sale of the house which will happen either when the owner dies or goes into care? Please enlighten me!
Answer
All current equity release plans have some form of early repayment charge (ERC), so please be careful believing companies advertising saying ‘no ERC’s’. Just as with a residential mortgage, you are free to repay your lifetime mortgage (the most popular type of equity release scheme) at any time and this is one of the conditions of the Equity Release Council.
But as you rightly point out, lifetime mortgages are not designed to be repaid until they end (when you die or move into long-term care) and so there are potentially ERCs to pay if you did want to fully repay your plan, or switch to another provider in the future.
Having previously been an adviser at Aviva, I’m aware that some of these ERC’s can been onerous – up to 25% of the amount borrowed. However, in recent years lenders have started to move away from such gilt-based ERC’s, towards fixed ERCs which could make it much more affordable and practical to close or switch your plan in the future.
ERCs do vary by lender and plan, but here are some fixed ERC examples and associated terms that lenders currently offer –
• 8 Year – 5% for the first five years of the plan. 3% for the next three years and none thereafter
• 10 Year – 5% years in one to five, then 3% years six to 10 and none thereafter
• 15 Year – 10% in year one, down to 2% of the balance outstanding in the 9th year. Thereafter, 1% in years 10 to 15 and finally no early repayment charge after the 15th year.
It’s also important to understand what the percentage penalty is based upon. Some lenders can charge their penalty on the amount that is repaid, some on the original amount that was borrowed.
There is a clear distinction that borrowers should be aware of.
Hence, those schemes that have been running some time with compounded interest, could have a higher ERC than those charging on the original balance (assuming the same percentage being applied).
As previously mentioned, there are no current lifetime mortgages that are ‘ERC free’. However, some now offer a ‘downsizing protection’ feature whereby if you did move home in the future, then you can repay the loan without penalty. Again, there are variations on this theme.
Most companies would state the plan needs to be in force for five years before this option can be exercised. Aviva’s new plan say it only needs to be three years from inception, however, bettering this, Hodge Lifetime recently changed its downsizing criteria to be able to repay your loan from day 1 from commencement of the plan, with no penalty.
With so much variation in how lenders apply ERCs, it’s important that you discuss your needs with an expert adviser at Equity Release Supermarket who will be able to find a plan that meets your needs both now and in the future.
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Question
What sort of product should I go for?
I have recently been considering equity release as a way of increasing my pension pot in retirement since I have very little savings and since I benefit from only a small proportion of my departed husband’s pension.
I have been online and had a look at some comparison sites but now I am more confused than ever! How do I know what ‘flexi lite’ or ‘drawdown’ are and how they will benefit me personally? Ideally, I would like to take out a percentage of my property (maybe 60%) and have this money as a regular income. Does that mean I should opt for drawdown?
Answer
As more lenders enter the lifetime mortgage market (which is the most popular type of equity release scheme) and they introduce new plans, it’s no surprise that you are confused by the choice that’s now available.
The best way to find a plan that meets your individual needs is to talk through your financial situation with an expert and impartial adviser from Equity Release Supermarket. As we are not tied to any particular lender, we can search the entire marketplace for you.
There are really two main ways you can provide yourself with an income using lifetime mortgages. These are via a drawdown plan, where you control what amounts you take and when, or a more disciplined route using a specific monthly income paying plan.
If you are looking for a regular income, Legal and General do offer a lifetime mortgage that pays a fixed monthly income into your bank account and acts as a way to support your monthly pension income.
You can learn more about L&G’s income plan here
Drawdown lifetime mortgages work differently and aren’t specifically designed to provide you with a regular, monthly income. With a drawdown plan, the lender will offer you a cash facility, which is the maximum you can borrow and is dependent upon your age and the value of your property.
Once you have withdrawn an initial amount from your cash facility, you are then free to dip into it at any time in the future, without any additional admin costs. The main advantage of a drawdown lifetime mortgage is that as you are only charged interest on the amount you borrow. Therefore, they can be an effective way of managing the final amount to be repaid, which is made up of the amount borrowed and the accrued interest.
We find that drawdown lifetime mortgages tend to suit people who need a smaller initial amount of money to fund a purchase such as a new car or minor home improvements and don’t need the maximum they can borrow in one go. They then have a future cash reserve facility they can use as and when required, if at all.
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Question
Switching to a RIO from an interest-only mortgage
I have read, recently, that retirement-interest only mortgages are an option for couples such as my wife and I, who are approaching retirement and still paying off an interest-only mortgage.
However, we are concerned our pensions might not be enough to cover the repayments. My wife did not work after our children were born (some 30 years ago!) and I have been the breadwinner. I think my pension will provide us with an income of £1,500 a month. Our house is worth £340k and we have about £280k equity – most of which is due to house prices rising. Would we be eligible?
Answer
Retirement Interest-Only (RIO) mortgages are an option if you are looking for a way to continue to repay your interest-only mortgage in retirement.
That said, they have not been as popular as first thought, as data from the Financial Conduct Authority, the financial services watchdog, revealed that only 241 RIO mortgages were taken up in the first quarter of 2019.
The reason quoted for this low take up is that because RIO mortgages are residential mortgages and the borrowers must prove that they can afford the interest payments for the rest of their retirement – and this applies if one person passes away or moves into care, if opting for a joint policy.
In your particular case, if anything were to happen to you at any point in the future, then your wife would have to satisfy the lender that she could continue to repay the interest on your mortgage from her own income.
Apart from Nationwide and Leeds Building Society, RIO mortgage lenders tend to be smaller building societies, which are traditionally more flexible in their decision making. But the only way to determine if you could be eligible for a RIO mortgage is to fully review your financial situation – which an expert adviser from Equity Release Supermarket can do for you.
Your adviser will consider all your lending options and given your situation, this would include all your interest-only lifetime mortgage options.
A lifetime mortgage could also be a solution for you because there are no affordability checks, your income is not assessed, you repay the interest monthly with the initial amount borrowed being repaid when the surviving partner dies or moves into long-term care.
This is another advantage a lifetime mortgage has over a RIO mortgage because your home cannot be repossessed for not meeting regular payments. If you were to die or move into long term care, with a lifetime mortgage, your wife could simply stop making monthly interest payments and allow the interest to ‘roll-up’ and be repaid when she dies or moves into long-term care.
This isn’t possible with a RIO mortgage and if your wife were to fall behind with the monthly interest repayments, then there is every possibility your home could be repossessed. These are all the discussion points you would have with your Equity Release adviser.
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