Switch equity release to save money as plans hit a record high


The number of equity release products has nearly tripled in the past year hitting a new record high of 1,557.

The number of plans available is nearly three times more than the 547 on offer at the end March last year, according to data from Key Partnerships, part of Key Group.

And Andrew Morris, of Age Partnership, says that the extra competition means this is good time fot those with older equity release deals to consider switching to a new plan with a cheaper rate or more flexibility.

He said: ‘Even though interest rates are rising there are still savings to be made, particularly for people who have had their original plan for some time.

‘A lower rate can make a huge difference on the overall cost of borrowing, leading to huge savings over the lifetime of the loan.

There are still savings to be made by switching equity release plans, but the message is act now before rates rise further.

Equity release unlocks the value built up in someone’s home, allowing them to access it in the form of tax-free cash. This can be used to boost income, fund home improvements or for other purposes for those over the age of 55.

The loan is then repaid through the sale of the property when the last surviving borrower dies or go into long-term care.

Interest does not have to be paid on equity release loans and it can be cleared on death. However, as the interest rolls up it can eat up a substantial part of a home’s value and so some deals offer the ability to pay off interest to protect inheritances.

Similar to those wishing to remortgage their home in the traditional mortgage market, it is also possible to switch an equity release product to another deal and lender.

Although interest rates have been rising in line with other mortgage lending, there are still potential savings to be had for those looking to switch away from their existing deals.

For example, the average interest rate on an equity release product in April 2016 was 6.15 per cent, compared to 4.33 per cent today, according to equity release adviser Age Partnership.

Someone borrowing £80,000 at 6.15 per cent would owe £207,878 after 16 years compared to owing £157,629 over the same time period at 4.33 per cent – a saving of £50,249.

New plans also offer the borrower the ability to make partial repayments during the loan term, reducing the total interest owed – though this is not compulsory.   

Morris said: ‘With the cost of living increase, more people than ever are looking at switching their equity release plan as a way of saving money.

‘There are still savings to be made in spite of the rising rates, it’s also worth noting that there are still lots of rates below 4 per cent available.

‘Anyone considering switching their old plan should contact an equity release adviser as soon as possible to ensure that they secure the lowest rate available.’

Lowest rates for a 71 year-old taking a £65,000 lump sum from a £350,000 home
Provider Rate  Partial repayments  Arrangement fee 
Pure Retirement 3.7%  Yes  £500 
Pure Retirement  3.75%  Yes  £0 
Canada Life  3.78%  Yes  £650 
Pure Retirement  3.78%  Yes  £895 
More2Life  3.8%  Yes  £0 
Aviva  3,81%  Yes  £0 
Source: Age Partnership Plus      

Whilst rates are on the rise, the degree of flexibility offered to borrowers either in making regular interest payments or ad hoc partial repayments is also increasing.

All new equity release customers can now benefit from the ability to make ad-hoc penalty free repayments, thanks to new rules introduced by the Equity Release Council earlier this year.

This is in contrast to the same time last year, when just 330 plans – 60 per cent of those available – offered one-off fee-free repayments.

The one-off penalty-free repayments are up to a level agreed by the lender – but typically amount to up to 5 per cent of the total loan per year. 

Fixed early repayment charges on equity release plans have also become more of a feature across the market with around 979 of the 1,557 plans now offering a fixed early repayment charge making it easier and more affordable for customers to switch loans.

Early repayment charges are paid should the policy be redeemed before a customer dies or goes into care. 

Equity release: How it works and advice

This is Money has partnered with Age Partnership+, independent advisers who specialise in retirement mortgages and equity release. 

Age Partnership+ compares deals across the whole of the market and their advisers can help you work out whether equity release is right for you – or whether there are better options. 

Age Partnership+ advisers can also see if those with existing equity release deals can save money by switching. 

>> Find about equity release and get a free no-obligation guide   

This is similar to the early repayment charges you would pay if you redeemed a residential mortgage within a fixed rate period for example. 

When someone chooses to switch plan, the adviser will look at what early repayment charge they would need to pay and how long they would need to be on the new rate for to establish whether there is still a saving to be had. 

Will Hale, chief executive at Key Later Life Finance said: ‘Fixed early repayment charges typically decrease over a period of ten to fifteen years before decreasing all together.

‘Fixed  provide customers with the surety that they know how much it will cost to redeem at any moment over the life of their loan. 

‘Each lender decides what the structure for the fixed early repayment charge mechanism is and they typically reduce over the life of the plan, for example, starting at 10 per cent in year one and falling to under 3 per cent in year ten then gradually ceasing all together.

‘Many lenders also have a compassion clause which means that if it is a joint life case and the first borrower dies or goes into care, the remaining spouse can sell the property without any charges.’

Rising rates: The average rate across all lifetime mortgages is 4.81 per cent according to the financial information service Moneyfacts

Rising rates: The average rate across all lifetime mortgages is 4.81 per cent according to the financial information service Moneyfacts

Jason Ruse, business development director at Key Group added: ‘The expansion of the number of plans available on the market has been remarkable with the last year seeing the number nearly treble.

‘Developments in the market and the innovation in product design reflect the growth in lending and the demand from customers for more flexibility underlining how equity release has become a true later life lending market.

‘The rapid widening of choice emphasises the importance of expert independent advice for customers and the need for advisers to stay up to date with what is a growing and fast-changing market.’

How does equity release work?

Older homeowners tapped record amounts of cash from their homes last year borrowing £4.8billion in equity release mortgages in 2021, an increase of 24 per cent compared to 2020, according to the Equity Release Council. 

People choose equity release for all sorts reasons – to clear debts, to help younger family members onto the property ladder, to make home improvements, or even just to head off into the sunset for the holiday of a lifetime.

It can also help people withdraw cash from their own home without being at the mercy of the checks and balances required for a typical mortgage.

However, it does mean they leave less of an inheritance for their loved ones, and the interest paid can be significant – especially if the borrower lives for a long time after taking out the loan.  

Equity release loans, also known as Lifetime Mortgages and Home Reversion Plans, allow homeowners to get a loan secured on their home, worth up to 60 per cent of its value, while still remaining the sole owner. They can use the money for anything they like.

If they still have a mortgage on their home when they take out the equity release loan, they must use the loan to pay off their mortgage in full.

Lifetime mortgages are the most popular type of equity release product, and are available to homeowners who are aged 55 or over.

Homeowners can opt for a drawdown lifetime mortgage or a lump sum lifetime mortgage.

Drawdown equity release mortgages allow you to take cash out of your home as and when you need, rather than in a single lump sum.

Some homeowners are using equity release to clear debts or to help younger family members onto the property ladder

Some homeowners are using equity release to clear debts or to help younger family members onto the property ladder

Lump sum equity release mortgages allow you to access all of the cash from your home in one go.

Equity release allows homeowners to avoid having to make monthly payments, unless they choose to, as the entire balance can be repaid when the home is sold.

If you choose to make no interest repayments the unpaid interest is added to the loan, meaning the size of the loan will increase over time.

Alternatively, you can opt for products which allow you to pay the interest each month. There are also products that allow you to pay off both the interest and the loan amount each month.

The decision to release cash from your home should never be taken lightly.

There will typically be a set-up cost, whilst interest on the loan will roll up and need repaying when the property is sold. The longer someone lives, the more interest will accrue.

It is a requirement to get financial advice before going ahead as you need to be certain that you’ll have enough money in retirement.

There may also be a better option. For example, selling up and downsizing to a smaller property may free up cash without any interest payments or charges attached.

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