Lifetime mortgage borrowers urged to see if they can switch and save ££.
- Number of borrowers switching deals has dropped by a third this year
- Brokers say many mortgage holders don’t realise it is possible to do so
- Damien Clarkson, 83, stands to save £17,800 in nine years
- Customers can get hit by punitive early repayment penalties
Those with Equity Release mortgages are being urged to check whether switching deals could save them money, after the number of people moving provider for a lower rate dropped dramatically in the past year.
The number of retirees switching deals dropped by more than a third in the first three months of 2021, compared to the same period the year before according to Equity Release broker Relaxed Retirement.
While almost 500 people switched their deal between January and March 2020, that fell to 331 this year.
Also known as Lifetime Mortgages, Equity Release loans are a way for older homeowners to access money tied up in their property, and then pay it back through the sale of that property when they pass away or go into full time care.
The homeowner must be aged 55 or over and can usually borrow up to 50 per cent of their home’s value. However, compound interest payments mean the debt can quickly grow in size.
Rates on Equity Release mortgages have been on the decline for some years. The lowest interest rates on offer are now around 2.5 per cent, having come down from highs of more than 8 per cent when the Equity Release market was in its infancy.
Relaxed Retirement said that the reduction in switching this year was partly due to the fact that some homeowners did not know they could switch.
Parvesh Mistry, Managing Director of later life mortgage broker Relaxed Retirement, said: ‘Persistent misconceptions around the switching of lifetime products could be behind the slowdown in remortgaging that we’ve seen so far this year.’
While many Equity Release products come with punitive early repayment charges of up to 25 per cent of the value of the loan for those who switch, doing so could still save them thousands if the interest saving across the life of the plan outweighs the one-off penalty payment.
‘The key message for consumers is that larger ERCs aren’t necessarily an obstacle to saving money and the younger you are, the less the interest rate needs to fall for switching to pay dividends,’ Mistry added.
Rates are now lower than ever before, so for those that have not already switched, doing so could save them thousands – as our case study below shows.
The number of Equity Release options is at a record high with 698 plans on the market, according to financial data provider Moneyfacts – this is more than double the amount available just two years ago.
Other brokers in the Equity Release market agree that many borrowers are still not aware that they are able to move plans.
Parvesh Mistry added ‘The option of reviewing your Equity Release loan every 12 months is a service that we have provided to our existing clients since we started trading.
‘It’s clear that the vast majority of people with existing Equity Release plans were not aware that they had the option of moving plans, potentially securing a lower rate and saving thousands of pounds by doing so.’
‘We would encourage anyone who has had their plan for longer than 12 months to take advantage of a free plan review, ideally from a whole of market broker who has access to all of the 698 plans available across the full range of lenders’.
If they switch, the borrower will need to use part of their new loan to repay the old lender.
The pace at which homeowners are re-broking their lifetime mortgages has still risen 44 per cent in two years, up from 230 in the first three months of 2019.
Currently, around four in every 100 Equity Release customers are switching each year, out of more than 300,000 outstanding mortgages.
Watch out for early repayment charges
Anyone considering a switch will need to watch out for punitive early repayment charges.
These are fees which must be paid if the plan is ended before the mortgage holder dies or goes in to long-term care.
Lenders are allowed to charge an eye-watering 25 per cent of the initial amount borrowed, though many charge less – and as our case study shows, some have exemptions in certain circumstances such as the death of a partner.
However, it could still be worth switching if the amount the borrower expected to save in interest over the years was more than the ERC.
A broker would be able to advise on this, but there are two common scenarios where this could work.
Firstly, younger homeowners who still had a longer term left on their mortgage may benefit from remortgaging, as the interest rate saving would be felt over many years – meaning it would be more likely to exceed the ERC charge.
But older homeowners who have a plan from the early days of Equity Release could also stand to save.
This is because interest rates then were much higher. Someone on a 7 per cent rate, for example, could stand to see their monthly payments cut in half by remortgaging to one of today’s sub-3 per cent rates – meaning they might only have to hold the plan for a short time until they made a saving equal to the ERC.
This will all depend on the property value and the amount borrowed and interest charged, so discussing options with a whole-of-market broker is essential.
Mistry added: ‘Lifetime mortgages don’t stop people switching to cheaper rates and it’s not just older borrowers who can benefit.
‘Long-time customers may have seen rates fall furthest but younger retirees have the added advantage of a longer remaining mortgage term.’
Another benefit of remortgaging an Equity Release loan could be to gain flexibility.
Whereas a standard Equity Release plan would only be able to be repaid once the borrower had died or gone into long-term care, sometimes leading to large compound interest bills, some providers now allow ad-hoc interest or or capital repayments to be made during their lifetime to cut down the cost.
Others offer ‘draw-down’ plans, meaning the money from their home is not released all at once, and they only pay interest on the sums that have been drawn down.