A lifetime mortgage doesn’t mean that it has to be for life ‒ failing to regularly review your plan could cost you £1,000s in extra interest.
The popularity of Equity Release has grown sharply in recent years.
There was a time when the market had a pretty bad reputation, but it has become a much more common ‒ and reputable ‒ option for older borrowers who are looking to tap into the equity they’ve built up in their property (you can learn all about how it works here).
Sometimes they will want the money to supplement their existing pension planning. For others, the money raised can help them pay off the existing mortgage on their property, ensuring they don’t have to downsize and can remain in their home.
Equity Release has also been a popular option for older homeowners who want to give their children and grandchildren an early inheritance, perhaps to help them get onto the housing market.
The reputation of the market isn’t the only thing that’s improved though ‒ the products have too.
And that has meant that thousands of borrowers on existing deals could find they save significant money by doing one thing that’s rarely been associated with the Equity Release market ‒ switching to a rival Equity Release deal, in much the same way as you might remortgage from a regular mortgage.
Why don’t people switch?
There are plenty of reasons why Equity Release customers don’t shop around for new deals.
The first is apathy. Just as millions of households do not remortgage every couple of years, ending up on the lender’s standard variable rate (SVR), so too do plenty of Equity Release customers find a deal and then sit on it for life.
A big part of that is the way that Equity Release deals are presented and sold, however.
Few of us think of a regular mortgage as a loan for life, but that’s not really the case with Equity Release loans which are often portrayed as essentially being the last loan you’ll ever take out.
That image doesn’t lend itself to something you go back to shopping around for every couple of years ‒ they are called lifetime mortgages for a reason, right?
Another part of the reason Equity Release deals are viewed in this way is the fact that they come with significant exit fees. And those exit fees are really the number one reason that borrowers are put off from shopping around for a new deal.
The exit fees vary sharply between different Equity Release lenders, but you can expect to pay a hefty percentage of the sum you’ve borrowed, particularly in the first few years.
Can I still save?
Understandably the size of those exit fees will go some way towards putting people off shopping around for a new deal.
But it’s still possible for borrowers to shop around and save money, precisely because of the incredible falls seen in the interest rates on Equity Release deals of late.
Data from financial information site Moneyfacts in February found that the average rate of lifetime mortgage has dropped to a new record low of 3.95%.
This is largely down to the level of competition in the Equity Release market today, with the number of products borrowers can choose from jumping to a new record high of 488 different deals.
That’s a substantial change from a few years ago, when it wasn’t that uncommon for rates to be well over 6%. And it means that even if you do have a hefty exit fee to pay, you may end up significantly reducing the eventual size of your loan and saving you thousands.
As an industry, the Equity Release market isn’t doing a great job of highlighting the fact that borrowers can ‒ and frankly, should ‒ shop around every couple of years to see if they could save by moving deals.
This is somewhat understandable, since it’s not exactly in the interests of lenders to point out that their customers might be better off elsewhere, while there’s no regulatory requirement for advisers to stay in contact with borrowers after they have arranged that initial deal.
That may change though, with brokers lobbying lenders and the main trade body, the Equity Release Council, to do a better job in communicating with existing borrowers.
Until that happens though, it’s up to individual borrowers to be proactive and take charge themselves. That means tasking an independent adviser with shopping around every couple of years to establish how their deal compares and what money can be saved.