Record low-interest rates for Equity Release loans

25 February 2020

Equity Release (ER) loans, that are secured against a property and paid off from the sale of that property when the borrower dies, are being offered at record low-interest rates.

Our latest analysis of the entire mortgage market has found that Equity Release (ER) products are now available at record low interest rates, starting at 2.84%. ER, which is only available to homeowners aged 55 and over, allows borrowers to access the value of their home without having to move, and provides them with a cash lump sum.

Equity Release products available with a no-negative-equity guarantee

In the past, ER products have been criticised for their high interest rates, which in some cases have compounded to leave the borrower in negative equity and unable to move home. Today, products are available which have a no-negative-equity guarantee and even allow borrowers to move home and carry the loan over to the new property. With record low interest rates, they could offer older borrowers a cheaper way to borrow against their home. However, ER is a complicated product with lifelong consequences and should not be entered into lightly.

The lowest interest rate available today is 2.84% from more2life, at age 65. Rates have plummeted in the last 18 months, the average interest rate offered was 5.4% for customers aged 65, compared to 4.55% today.

Retirement Interest Only mortgages an interesting possibility

For older borrowers who have an income, Retirement Interest Only (RIO) mortgages may be a better way to borrow. RIO mortgages are similar to standard mortgages in that a loan is taken out against a property and the borrower must make monthly repayments. Borrowers have to undergo affordability tests similar to a standard mortgage and so need to have a secure income, such as a defined benefit pension or annuity. They are only available to those aged 55 and over who own their homes outright and can afford the repayments. Unlike ER, the amount borrowed is repaid while the borrower lives.

RIO interest rates have also dropped and the lowest rate available today is 2.79% from Marsden Building Society. However, RIO mortgages are also secured against the borrower’s home and independent financial advice should be taken before committing.

A particular example

There are significant differences between the two products[i] when comparing the overall cost over time.  Typically ER mortgages have higher interest rates than the RIO ones, although rates are at historic lows right now.  For example, the following are based on one of the better rates in the market today:

Equity Release at 65:

House Price

£250,000

Loan

£50,000

Rate

2.99%

Term (years)

20

Interest added

Monthly

   

Future Debt

£90,130

Cost of Loan

£40,130

Borrowing £50,000 at age 65 at 2.99% fixed for the term. By the age of 85, the borrower will have paid nothing but will owe the lender £90,130.  If house prices over that period had increased on average by 2.5% per year, the debt would represent 22% of the equity in the property, leaving the owner with 78% of the house value.

RIO Mortgage at 65:

House Price

£250,000

Loan

£50,000

Rate

3.19%

Term (years)

20

Interest calculated

Daily

 

 

Future Debt

£50,000

Cost of Loan

£31,900

Borrowing £50,000 at age 65 at 3.19% (fixed for 5 years). By the age of 85, the borrower will have paid £31,900 of interest (at £132.92 per month) and will owe the lender £50,000.  If house prices over that period had increased on average by 2.5% per year, the debt would represent 12.2% of the equity in the property, leaving the owner with 87.8% of the house value.

At current interest rates, the RIO option costs less over the long-term, although there are a number of considerations. The borrower would need to pay £133 per month and the interest rate is not guaranteed beyond the fixed period and could well rise over time. The borrower’s home could also be repossessed if they fail to make the interest repayments. The lender may expect repayment at the end of the agreed term, meaning the borrower might still have to sell their home in the future or take out Equity Release at that point.

Viable option for pension-aged borrowers?

“For those in later life who own their own home but need cash, borrowing money is not easy. Most standard loans and credit deals are not available to pensioners, leaving them with little choice but to release equity from their home. Equity Release has been criticised for being expensive and inflexible in the past, but with historically low rates and portable loans, they are a much more viable option for some borrowers” says Brian Brown, Head of Insight & Consulting (Banking & GI).

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Notes

Data sourced from Defaqto Matrix Database on 2 January 2020


[i] The key differences between equity release and retirement interest-only products:

Equity Release

Retirement Interest Only

Specialist advice required - advice fees paid by customer (often added to the loan)

Treated as a residential mortgage for advice purposes - advice fees often paid by the customer

No affordability assessment

Affordability assessment required

Home cannot be repossessed

Home can be repossessed

Repaid on special events*

Repaid on special events*

Interest roll up (or option to roll up at a later date)

Interest roll-up not available. Interest must be paid every month.

Interest fixed for lifetime of the loan

Interest fixed for a defined period only

No monthly repayments

Monthly payments of interest only

Lower LTV limits, age related

Higher LTV limits, not age related

Open-ended term

Can be term based or open-ended

Potentially significant early redemption fees

Early redemption fees usually for initial loan term

No Negative Equity Guarantee

Guarantee not offered/needed

May conform to Equity Release Product Standards

Do not conform to Equity Release standards

*Special events are when the customer dies or moves into long term care.

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