[col type=”one-third”]
Mark Gregory, Founder and CEO at Equity Release Supermarket
www.equityreleasesupermarket.com
Tel: 0800 678 5955
[/col]
[col type=”two-third last”]
[hr style=”single”]
Question
Equity release interest rates: How do they work?
I am trying to get my head around the nuts and bolts of equity release and I wondered if you could explain the difference between gilt early repayment charges and fixed rates, please. Also, how does this impact the interest rate?
Answer
Lifetime mortgages offer fixed rates of interest, as do some residential mortgages, with the significant difference being that lifetime mortgages come with fixed interest rates for life. This gives you peace of mind of knowing what the interest payable will be both now, and in the years to come.
Another commonality is that if you want to fully repay and redeem a lifetime mortgage, then an early repayment charge (ERC) may be payable dependent upon the circumstances.
Lifetime mortgages are designed to run for life and lenders cost their plans accordingly. Therefore, if a plan is redeemed earlier than anticipated, the lender could lose out financially and may need to recover this loss.
The ERC is calculated to recover costs that the provider incurs when setting up the lifetime mortgage and not for them to make a profit.
Having started my equity release career at Norwich Union (now Aviva) I have first-hand experience of how variable (gilt-based) ERC’s operate. We currently have four lenders offering gilt-based ERC’ – Aviva, Just Retirement, Legal & General and Pure.
Aviva allocate a single gilt to any new plan, dependent upon the age of the individual. For instance, someone age 65 taking a plan may be allocated the 4.35% Treasury Gilt 2039. The yield of the plan is noted on the day the new lifetime mortgage starts.
Should the plan be redeemed early and a penalty due, Aviva would check the that gilt yield on the day of redemption and in accordance with its ERC schedule (provided at inception) could charge a penalty upto 25% of the initial loan. This is dependent upon how far the gilt yield has fallen. Conversely, if the gilt yield has remained the same, or increased since inception, then no penalty is levied.
The other lenders offering gilt based ERC’s work on a similar basis, however they use the FTSE UK Gilt 15-Year
Index to measure their penalty. Again, they will mark the starting point of the index and see how it changes over the period to early repayment. The greater the fall, the higher the penalty becomes. These lenders such Legal & General can again charge upto 25% of the amount drawn.
Therefore, the size of gilt-based ERC’s can look onerous and run for the lifetime of the plan.
With lifetime mortgages becoming increasingly flexible, there are now situations where if a gilt-based plan be repaid early, no ERC applies. This varies between lenders, however some of the features available to mitigate ERC’s on early repayment are: –
• Downsizing Protection – applies when moving home and after a period of time (usually three or five years) you can repay the lifetime mortgage with no penalty
• Three-uear ERC Exemption – on joint plans, after the first person dies or moves into care the survivor has a 3-year window in which they can repay the lifetime mortgage with no penalty
• Voluntary payments – some lenders allow the full repayment of their plans using voluntary payments of up to 40% p.a. and allow you to pay it down to zero with no penalty
Finally, always bear in mind there are no ERCs when the plan is eventually repaid on death or second death if it is joint plan, or the survivor moving into long term care residential for all lifetime mortgages.
More recently, fixed ERCs have started dominating the market and brought a simpler way of calculating ERC’s which have been brought over from the traditional mortgage market.
Therefore instead of a variable penalty fixed ERC’s offer a defined percentage which lasts for a period of time, the shortest of which is currently eight years. Knowing in advance what an ERC could be, for many, offers more guarantee and with rates so low currently has attracted more shorter-term borrowers.
For example, Pure Retirement is currently offering their ‘Classic Super Lite’ plan with a fixed interest rate for life of just 2.39% APR and it comes with fixed ERCs that start at 10%, reducing by 1% per annum to year 10. The ERC remains at 1% to year 15, after which the plan can be fully repaid – penalty free. (Correct as 7th September 2020.)
There are many other plans that offer different structures of fixed ERCs and you can compare all the latest deals here. If you are researching equity release and ERCs are a consideration, then please speak to your local Equity Release Supermarket adviser, who will be able to answer all your questions and find a plan that meets your needs both now and in the future.
[hr style=”single”]
Question
Can I get a new deal?
I have been on an equity release plan now for five years but I have noticed rates are starting to look a lot cheaper than they were when I signed up. Can I switch to another deal? If so, how do I go about this and will I need to pay an exit fees?
Answer
Having been an adviser now for over 20 years, I’ve had plenty of experience remortgaging many older lifetime mortgage plans away from the higher interest rates they used to attract.
Switching lifetime mortgage plans can be done for a number of reasons, not just for a lower rate, although this is the most popular reason.
The first thing to do is to assess whether it’s in your best interest to change plans by conducting a comprehensive ‘switch analysis’ exercise. This basically studies your existing plan – interest rate, current balance, any early repayment charge, closing admin fee and its existing features.
We would then calculate how much capital is needed to set up the new plan. For instance, we need to account for the set up costs of the new plan (application, valuation, legal and advice fee – where applicable), exit penalties from the old plan and we add two months interest as an estimate of how long it would take for the new plan to start.
We would then consider any features or benefits that you may be losing from your existing plan and then complete an in-depth personal questionnaire, where we’d establish what features you require in the new plan.
Armed with this information, we would then conduct our research from the whole of the market to find which lifetime mortgage plan could offer the amount and features required – at the best interest rate available.
Our analysis tool will then compare both plans and establish the break-even point – this is where it becomes profitable for you to switch plans.
As long as this period was reasonable and fits with your age, and future life expectations, then you could proceed with a switch to a new company and product.
Here at Equity Release Supermarket we have a handy switch calculator that provides a break-even point as to when switching would be most favourable. Our advisers have also been trained to conduct full switch analyses, and check whether it would be in your interests to move your plan to a new lender.
As you can see, there is more to switching than just finding a better interest rate. Newer plans have many more features than previous such as downsizing protection, voluntary payments, inheritance protection, fixed early repayment charges and three-year no ERC window on death/long term care for joint plans.
The viability of changing plans is usually determined by the early repayment charges of your current lender and so I recommend that you speak to one of our independent and impartial advisers at Equity Release Supermarket, who will be able to advise you on the best route to take.
[hr style=”single”]
Question
Downsizing versus equity release?
We were looking at releasing equity on our property to pay for our retirement (husband and I were worried our pension would not stretch). However, now the stamp duty holiday has been enforced and following the lockdown we are starting to wonder if we should leave the city and head off to the coast, thus downsizing?
It seems a no brainer but we wanted to check there were no benefits of releasing equity that we hadn’t considered. Not just practical, but financial.
Our house, in a London suburb, is worth approx. £550,000 and we are looking at coastal properties on the market for £200,000. But we would need to travel frequently to see our London-based children and grandchildren.
Is there a questionnaire we could do to find out the financial pros and cons to help us with this big decision?
Answer
It can be difficult to decide what is the best course of action for you when considering how to fund your retirement.
Downsizing is certainly one option and assuming you have no mortgage, you could purchase the £200k property and have the capital released to use for your retirement plans, whether that be for income or investment purposes. A nest egg for the future.
However, downsizing does come with associated costs – such as Stamp Duty on the purchase of the new property, though as you point out this is £0 on a property valued at £200,000 until 31 March 2021, plus there are estate agent’s, moving and solicitor’s fees to consider.
Many people also don’t think about the costs of repairing or modifying a new home to make it personal to their own taste. Also, many decide against downsizing as it involves moving away from family, friends and their support network.
You also need to think about the inheritance you want to leave for your loved ones as the value of a costal property, at less than half the value of your home in London, may not appreciate in value at the same rate in the years to come. Obviously the larger your estate, the larger your inheritance will be.
Equity release is also an option you could look at, as well as the other types of ‘later life lending’ such as retirement and retirement interest-only (RIO) mortgages.
They all come with their own pros and cons but the main difference between equity release and retirement mortgages is that with retirement mortgages you are able to borrow more (now up to 75% of the value of your home) – which means that you could access more money than through downsizing, but you are committed to making monthly repayments or interest and/or capital – which may not be financially viable for you.
Lifetime mortgages can work much more flexibly than a retirement mortgage for post-retirement purposes where regular payments are required over a period of time.
For instance, we have drawdown plans where after taking an initial lump sum, you have access to a cash facility where you can draw money (usually a minimum of £2,000 a time) as and when required in the future, with no further admin charges.
There are also income plans which offer a fixed income over a fixed number of years (10, 15, 20 and 25) that can help supplement your retirement spending and bridge any shortfalls.
How much you can borrow through equity release (lifetime mortgages are the most popular option) depends on the age of the youngest borrower and at age 65, you can access up to 39.8% of the value of your home which rises to 45% at age 70.
So, depending upon your age, you may not be able to realise as much money through equity release as you could through downsizing – if that is your main reason for wanting to downsize.
Which brings me around to inheritance again. Equity release will reduce the value of your estate but by how much is entirely dependant upon you as you are able to manage the amount to be repaid through the lifetime mortgage plan that you choose, and whether you want to make ad hoc or regular repayments.
We have a free to use equity remaining calculator, which will give you an idea of the value of your estate in the future – which takes into account rising house prices.
As you have a lot to think about, I recommend that you speak to an independent adviser who will be able to talk through your financial situation and recommend a solution that is right for you both now and in the future.
It costs you nothing to talk to one of the expert advisers at Equity Release Supermarket and they would be more than happy to guide you through your options. You can find your local adviser here.
[hr style=”single”]
[/col]
