This would be extremely welcome as most products do carry early repayment charges, and they tend to be high as they are fixed at the outset or linked to gilts.
Loan-to-values tend to be low, with somebody who is aged 70 generally able to borrow around 40 per cent of the value of their home, while someone aged 80 can usually borrow around 50 per cent. Some lenders may consider lending slightly more or offer a slightly cheaper rate if the applicant has an illness that may reduce their life expectancy.
Rates for equity release have reduced significantly in line with long-term gilts; for example Legal & General reduced its low loan-to-vale (LTV) standard rate to 4.5 per cent monthly equivalent rate (MER) on 4 August; by the middle of that month, it had fallen again to 4.24 per cent MER. By the end of August the rate had been cut to 3.82 per cent MER and it is now 3.65 per cent.
For larger loans the cheapest rate is with Legal & General. The loan amount has to be £250,000 plus, and the rate is 3.47 per cent MER with a fee of £1,999.
Equity release rates always used to be fixed, but there are now some variable rate options. For example, One Family has a variable rate from 3 per cent annual equivalent rate, which increases in line with consumer prices index. Some equity release lenders will offer a reserve, so the applicant can draw down an initial lump sum and then draw more later. The advantage of this is that the borrower will only pay interest on the amount drawn – not the amount in reserve. However, the reserve will always be at the prevailing rate of interest.
The big issue with equity release is the compounding effect of rolling up the interest. This has earned the sector a lot of bad press over the years as it can be expensive. A £250,000 lifetime mortgage taken out by a 65-year-old at a fixed rate of 3.47 per cent would compound up to a total debt of £353,500 by the time the borrower dies, for example, 10 years later aged 75 or £420,500 at the end of 15 years.
However, Aviva, L&G and Hodge all allow the interest to be paid on a monthly basis, which helps to slow down the compounding effect. In many instances we are finding that these interest payments are made by children or even grandchildren who have the income to cover these outgoings.
One advantage of equity release is that the set up costs are relatively low. Arrangement fees are usually quite cheap with some lenders not charging them. Many lenders offer free valuations through equity release packager clubs.
Brokers are being called upon more than ever before to advise on later life lending, but equity release is a highly specialist area. Ideally, advisers should be able to consider conventional mortgages as well as equity release as the latter is not always the best option and tends to be more expensive than a conventional mortgage. Financial advisers should be aware of equity release and have a qualification that enables them to advise in this area.
