Are equity release rates affected by Bank of England base rate rises?
Question
I’m keen to understand a bit more about equity release as my wife and I are looking at this an option for funding home improvements and to support our living costs.
I understand mortgage rates are very high as a consequence of the financial environment we face.
Do equity release rates tend to be impacted by factors such as the Bank of England’s interest rate rises and also other economic factors? If so, would I be sensible to wait for a year for things to calm down?
Answer
Thank you for your question, and yes the sudden increase in interest rates has been a topic of conversation with economists, experts, and the general public over the last few months. Within the UK we have lived for over 10 years with very modest interest rates, and this has been beneficial for mortgage holders, but not so good for savers.
However, over the last few months we have seen the Bank of England increase rates from an all-time low of 0.1% to 3.5% today. (15.1.2023). For example, one expert has forecast they expect the Bank of England to raise interest rates to a peak of 4.5% in 2023, but this is impossible to confirm.
Here at Equity Release Supermarket, we have seen interest rates increase on flexible Lifetime mortgages in-line with the Bank of England, as they have increased by approximately 3% since the recent economic crisis. The lowest rate at the time of writing is a lifetime fixed rate of 5.94% MER (6.22 APR) on the Pure Classic Super Lite.
However, one of the features of a flexible Lifetime mortgage is that you will benefit from a fixed interest rate for the rest of your life, or until you need to go into long-term residential care, so they can’t rise in the future. Furthermore, all plans have the option of making flexible, voluntary, monthly, or ad hoc payments to manage the interest and future balance of your plan.
The question over waiting a year is entirely a decision based on your requirements for finance. Certainly, if there is no immediate need, then waiting and reviewing at the point where funds are required would make good financial sense. We obviously have no crystal ball as to future rates, but we have seen a period of stability since the economic upheaval at the end of 2022.
One of our friendly, whole-of-market expert advisers can provide you with a personalised illustration that contains the current fixed interest rate in-line with your objectives. We also can provide tools on our website such as our popular flexible voluntary payment calculator which allows you to see how your estate can benefit from making payments, should you wish to do so. The illustration and calculator are available free of charge so you have nothing to lose if you would like to make an enquiry.
Repayment options: Are all equity release products the same?
Question
Do all the products which are part of the equity release market have the same repayment terms or can I find some with other options?
I understand you take out the deal until you move into a care home or die, and then the loan is repaid? But are there any other options? If so, how do I find out more?
Answer
Your understanding is correct because you can take a plan that is in place until you move into long-term residential care or die. When looking at equity release it is right to consider both payments and repayment options. This is because depending on your personal circumstances, you may be able to secure a Retirement Interest Only Mortgage (RIO), or alternatively a Lifetime Mortgage.
One of our friendly expert advisers can provide you with specific information on the availability of both, and you can also find further information on the Equity Release Supermarket website.
However, to explain, a RIO Mortgage is a mortgage that you can retain for the rest of your life or until you need long-term residential care. The amount you can borrow from a RIO is determined by the amount of income you have either pre and post retirement, as you have to demonstrate you can make the payments until it is repaid on death or long-term care.
With a Retirement Interest Only Mortgage, it is possible to secure a fixed rate for a short-medium or over the lifetime of the mortgage; however, you are committed to making contractual payments and your home can be at risk of repossession, if monthly payments aren’t maintained.
Lifetime mortgages are different because how much you can borrow is determined by how old you are and the value of your home. Your income is not stress tested because you are not committed to making contractual payments and you decide whether to make monthly, or flexible ad hoc payments.
Of course, with a flexible Lifetime mortgage you do not have to make any payments which is the attraction for many customers, though the interest will increase in-line as your personalised illustration (quote), which an adviser can provide, should you decide not to make payments.
Please be aware that both mortgages have different early repayment charges. For example, if you choose a RIO with a fixed interest rate for five years, you are likely to be able to repay the mortgage after five years without an early repayment charge.
With Lifetime mortgages, they have a fixed rate of interest for life, or until you enter long-term care; however, they have early repayment charges including eight, 10 or 15 years.
For a discussion and information on the best option for you free of charge and without obligation, talk to one of our friendly expert whole-of-market advisers who will be happy to guide and help you.
Can I release equity to give to someone else?
Question
My home is now mortgage free and I’ve therefore got very little in the way of outgoings since I retired. I also have quite a comfortable pension.
However, my daughter and her husband are trying to get onto the property ladder to purchase their own home and struggling to build a deposit big enough.
I would like to gift them some of the money from my house. Can I use equity release to do this? Are there any rules against the cash being gifted to someone else and do I need to get legal advice?
Answer
It is nice to know that you feel comfortable in retirement, and that you are able to consider helping your daughter. Gifting capital or transferring the wealth you have built up within the equity of your home to your family and relatives is proving very popular.
Here at Equity Release Supermarket our expert advisers have helped customers to release equity to gift money to their children for a number of objectives. These objectives include gifting capital for a deposit for a property purchase, property extensions to accommodate a growing family, or just helping relatives through this cost-of-living crisis.
Depending on your personal circumstances, you are able to make capital gifts without incurring any inheritance tax liability. Here at Equity Release Supermarket, we specialise in equity release and not Inheritance Tax planning.
I have referred to the government website which confirms that you can make certain gifts including gifts to your family each year free of Inheritance Tax. Furthermore, the government website states that Inheritance Tax may have to be paid after your death on some gifts if you die within seven years of making the gift, depending on: who you give the gift to, their relationship to you and the value of the gift.
Additionally, the government website states there is normally no Inheritance Tax to pay if the value of your estate is below the £325,000 allowance and if you are married or in a civil partnership any unused allowance can be added to the surviving partners estate on first death.
At this stage of your planning, one of our expert advisers can help explain how much you may be able to gift to your daughter and guide you how to make a gift. Furthermore, depending on your circumstances they may suggest that you take advice from a suitably qualified inheritance tax specialist.
During the advice process for equity release you will need to take your own independent legal advice, and once again one of our expert advisers can introduce you to a specialist legal advisor from our panel of expert legal representatives. Additionally, and very importantly, you will not have to pay for our advice fee or the legal advice if you use the services of one of the panel expert solicitors until any application completes.
Releasing money from my parent’s home: How will it impact the family?
Question
My parents are talking about using equity release to pay for a garden office and gym! We are all quite surprised about this as they don’t work, nor do they work out…! However, clearly they have a new lease of life and my sisters and I are welcoming this.
The problem is we are bit concerned about the equity release process and how it might impact us – their three children. We are grown up and have left home.
We’ve heard equity release has had a bad reputation the past and also that it might mean we won’t inherit any money. How can we find out more and ensure our parents don’t make a bad choice?
Answer
I have worked as an adviser and CEO for Equity Release Supermarket for over 20 years, and I applaud and encourage family members to be cautious. I understand that they want to ensure that their parents make the best decision and not to make a decision they may regret later. This is because raising capital from the equity in your home needs expert whole-of-market advice, and careful planning.
Personally, I am not surprised by your parents plans because raising capital for their objective is not uncommon to us here at Equity Release Supermarket. For example, many retirees want to benefit from spending more time at home relaxing in summerhouses, home offices and hot tubs within their gardens, and keeping an eye on their fitness now they have retired.
Equity release is a long-term commitment, so making the right decisions after taking expert advice is crucial for your parents. However, you are right to be sceptical about equity release because of the chequered history with now defunct plans that continue to attract bad publicity.
I can confirm that the modern flexible Lifetime mortgage has many features that have proved attractive to both plan holders and their families. These features include retaining 100% ownership of the property, fixed lifetime interest rates, fixed early repayment charges, and downsizing protection feature.
Another popular feature that has just been adopted by all providers, as it has become a standard of the Equity Release Council, is the option to make flexible payments to manage the mortgage. Plan holders can make payments of up to 10% of the capital they borrowed each year without penalty, and this can include the fixed interest payments. Families can help with the payments, so they can ensure that the loan their parents borrow remains at a capital balance or they can even pay the interest and part of the capital.
However, there is another feature that may be an option for your parents which is the Inheritance Protection Guarantee that allows them to ring fence and guarantee a certain amount of their home for their beneficiaries depending on their circumstances.
Here at Equity Release Supermarket, we encourage family members to be involved with the decision making and advice process, and with your parent’s permission you are more than welcome to attend any meeting with our expert whole of market adviser during the decision making and advice process.
Meet our expert
Mark Gregory, founder and CEO of Equity Release Supermarket, is here to answer your questions. Mark is an adviser himself with over 20 years equity release experience. He launched Equity Release Supermarket 10 years ago and it has grown to become one of the UK’s leading equity release specialists. Email kate.saines@emap.com to ask him a question
