In recent years, not only has there been an increase in homeowners looking to release funds from their home via equity release, but the market has also grown more competitive with lower fixed interest rates and increased flexibility within the plans.
Whether you already have an equity release plan in place, or it is something you are considering, it is important to keep the costs down as much as possible in order save you money and help mitigate any long term impact on your finances and your estate. Here we will take you through some steps, tips and ways that you can reduce the cost of equity release.
Carefully consider your needs
If you are thinking about releasing money through equity release, then it is important that you thoroughly look at your finances and ensure that you balance any current wants with your future needs. Having access to a lot of money now can sound extremely appealing but remember that this will leave less of your estate for your beneficiaries. In addition to this, for those who are in receipt of means-tested benefits, accessing this money could affect how much and what you are entitled to now and in the future.
It might be that you want to go ahead with equity release but maybe reduce the amount that you release or receive the money in smaller instalments rather than a single lump sum, or even pay part or all of the monthly interest.
One main factor that will most affect how much your equity release costs is the interest rate on your loan. If you do not pay the interest, over time, interest is added to the amount you released plus any interest added during the life of the plan, this is called compound interest and basically means that interest is charged on the interest. Therefore, if you don’t secure the best deal on the interest rate at outset, the overall cost of equity release will be more on the loan over time than it could have been.
If you are looking to take out equity release for the first time then be sure to search the market for the best plan with the lowest interest rate that meets your requirements, plus other features that you require such as downsizing protection or inheritance protection. If you already have a plan in place that you took out more than a year ago, then it could be worth looking into the possibility of what savings could be made if you were to switch equity release lenders. Be sure to check first if there are any fees or additional charges that you will have to pay in order to switch as this could determine if it is worthwhile financially or not.
Different types of equity release plans can offer borrowers more flexibility that is better suited to their needs.
- For example, a lot of plans now allow homeowners to take drawdown on their equity release which means that instead of getting the cash all in one go, they can receive it gradually overtime. Because interest is only paid on the amount of equity that is actually released to the homeowner, the borrowers only begin to incur interest charges on the money they have accessed.
- Some equity release plans include the option for borrowers to repay some of the interest each year or alternatively to make partial repayments on the borrowed amount within the terms of the plan. This flexibility can help homeowners to reduce the final amount that they have to repay when the property is sold, thus leaving a larger inheritance behind for their beneficiaries.
- Features such as downsizing protection or inheritance protection might not be something that is part of your current plan. If this is the case, then switching to a plan that includes them could allow you to unlock these additional benefits.
- Those with qualifying health conditions that meet the criteria for an enhanced plan could access to more cash at different rates.
Equity release lifetime mortgages are designed to “last your lifetime” because of the costs in setting them up by the mortgage lenders. Therefore they all have some degree of penalty if you decide to repay the plan early. However the plans have different ways in which these penalties work and some actually have an end date making it possible to repay the loan with no penalty after a certain amount of years. We have explained the two types below.
- Fixed early repayment charges – Some of the plans have a penalty for a specific length of time and a known specific cost, perhaps for the first 8, 10 or 15 years at percentage of the loan amount, these are called fixed early repayment charges and have a known end date and absolute cost that will not change. This is very similar to the way a normal residential mortgage works.
- Variable early repayment charges – Other plans have variable early repayment charges that can last for the life of the plan and the cost of these relates to certain financial market conditions. For this reason the potential cost in the future to repay early could be high, in some cases as much as 25% of the loan amount although they can also reduce to zero charges under certain market conditions. These market conditions usually relate to long term gilt rates.
Both of the above are fully explained and considered with our advice and therefore when looking at the critical overall costs of a plan, this can be a major factor for consideration especially when a heritance may be expected or anything which may mean repaying the loan after a certain time period in the future.
Further as the age of new borrowers is becoming lower, with the starting age of 55, some customers could potentially be more likely to find themselves receiving a future lump sum from an inheritance, pension or other asset sale, that may enable them to repay a lump sum or all of their equity release plan. The plan could be expensive to repay if the wrong choice has been made, for instance where perhaps sole focus has been on other factors such as interest rate and hence why holistic advice of an experienced Bower equity release specialist is essential.
For those who are considering equity release, it is always recommended to seek independent, professional advice from the likes of a specialist equity release adviser or home finance specialist such as Bower. They will be able to take into account your individual circumstances and compare equity release rates across the whole market from all the various different lenders to find a plan that offers the very best deal, at the lowest rates, with the most flexibility. By utilising the services of an equity release expert, you could gain access to better and more competitive deals as well as a resource for guidance and advice before you make such a big financial commitment.
If you are interested in equity release and would like to know how much tax free cash you could potentially release then try Bowers free, easy to use equity release calculator.