Craig and Mark Thompson explore the idea of switching Equity Release Mortgages.
Why is now a good time to look at switching your Equity Release Mortgage?
Because interest rates are so low at the moment we have been proactively going back to clients to explore alternative borrowing opportunities. But clients are also coming back to us, to see whether they can save money on their interest and potentially borrow more money.
When you look at compound interest over the long periods of time that you might take a lifetime mortgage, a cheaper rate won’t make any difference to you as an individual. Ultimately, you won’t be around when the debt is repaid – but reducing your interest rate could have a massive impact on your family and what’s left in your estate.
What do I need to think about in deciding whether to switch?
While it always pays to keep an eye on the rates, you also need to know if there are penalties to get out of the existing mortgage. What these are will inform whether it’s worth paying that mortgage off and moving onto a new deal.
With normal residential mortgages, people remortgage all the time. They take a fixed, cheap rate, and then switch when they are about to be put on the standard variable rate, as that would start costing you money in the long term.
With equity release, after people have taken their initial borrowing the danger is that they just forget about it, which could cost their estate a lot of money over a period of years.
Why is it important to look at switching?
As we generally know, the people that complain about equity release are not the people that take it. It’s the families left behind that make a complaint because they’re left with the debt, so to speak, which is taken from the mortgage holder’s estate.
An episode of Ripoff Britain recently featured someone complaining that his father had taken equity release many years ago, and he wasn’t happy because there wasn’t much left in the estate.
Now, this was confusing. Surely somebody at some stage should have gone back to that gentleman as he’d taken the loan at a very high rate? Why wasn’t he advised to rebroke, and warned that his equity would diminish quickly at such a high rate? To me, that was a failure of his advisors.
Nobody wants to go through this process too often, but if rates have dropped significantly it’s time for a review. The rates now are extremely cheap, especially for lifetime fixed mortgages. You can now fix your mortgage for life at 2.7%, whereas in the old days people were borrowing at 7%, 8%, even 10%. With a lifetime mortgage at a 10% compounded rate it would not take long before you run out of equity.
Could I benefit from other features by switching?
Lifetime mortgage products have evolved so much in recent times and there are more features that you could access, as well as better rates.
For example, downsizing and inheritance protection are both features we have previously talked about. These wouldn’t be available on an older product but could be helpful to you.
A few years ago there were 200 lifetime mortgage products available. Now, there are about 600 and it’s a very competitive market. These providers are throwing in all sorts of new benefits to customers to make the products more customer friendly. So there’ll be much better deals out there with better options if you need to pay the loan off or decide to move.
How does my equity help in switching my lifetime mortgage?
With the way house prices have increased, the value of your home will have grown massively over the past ten years. If you tapped into the equity you had ten years ago for a mortgage, why would you not do that again now, given the fact that your circumstances are the same?
House prices have gone up by 13% this year, on average, all over the country and 20% on the coast. As we know, a lifetime mortgage is based on your age versus the house price. So you can borrow a percentage of the property value dependent upon your age. The more you borrow against your property, the higher the rate, because the more the risk there is for the provider who’s lending you the money.
Say you have a house at £200,000 and want to borrow £50,000 which is only repaid once you die or enter long term care. In essence, the lender is taking a big risk because the Equity Council makes them sign up to a no negative equity guarantee. It means the estate can never owe more than the value of the home. This is why the rates are more expensive on higher loans compared with the value of the house.
Imagine I had a house that 10 years ago was worth £200,000 and I’ve been compounding interest at a certain rate. That house now might well be worth £300,000. So if I then review my mortgage, I might be looking at a much better rate because I’m now borrowing a lower percentage of the value of my home.
Could I borrow more by switching my lifetime mortgage?
Yes, you can borrow more, but as you know, we have a very robust process and we would never advise anybody to take money that they didn’t need.
But people often choose equity release because they do need the money. And there’s nothing to stop them going back to the original lender to ask for more. You can build in drawdowns and set money aside.
You might have borrowed £50,000 when you took the mortgage, knowing that you can access a further £20,000 in the future. If you haven’t drawn it out of the mortgage, you’re not paying interest on it.
But rather than deciding to take that £20,000 now, it’s worth exploring your deal, what it’s costing you and whether it would be better to repay your debt and switch to a plan with a lower interest rate and more benefits. That’s why it’s important to get advice before you make the decision.
What happens if I have a health condition? Can I still switch my mortgage?
In fact, you can often borrow more money if you have a health condition that has developed since you took your original equity release product.
If you need healthcare or work done to the house, this is something that you can fund through additional borrowing. Again, it comes back to the concept of risk that we discussed earlier. A provider lending to a healthy 70 year old might be concerned that they could live to 100. The risk is that it could be a long time until the debt is repaid and the lender could end up with no equity left if the interest compounds up over the value of the property.
But if you’ve got an illness that is going to impact on your lifespan, then lenders might be prepared to lend you more money, roughly about another 10%, depending on the provider. For example, a lender might have originally offered you 30% of the property value and now might go to 38%.
If I want to switch my lifetime mortgage, what will you need from me?
The process is almost identical to the initial lifetime mortgage application. For me to advise you, I need to understand whether equity release is the right thing for you. I will explore your full financial situation with a financial review.
We would discuss whether you need more or less money than at the start of the loan. It may be that we can pay some of the equity release off and take less. It may be that we could pay the loan off entirely.
I’d also look at your existing mortgage, what it entails, whether there are any penalties and what those are, and what the rules around repayment are.
Then it’s a question of matching suitable products to your needs – which is a crucial part of the advice with so many products out there today.
Certainly we don’t charge for this advice, and there are no costs generally involved from our angle unless people actually complete the switch. At that point we will need various documents just as with the initial application.
Finally, don’t think you’re wasting our time by asking us to review your situation. We’re very happy to provide advice, and if you decide not to pursue a switch, that’s absolutely fine – in fact, we may well advise you not to make a change if there’s nothing to gain. Just get in touch and we’ll explore everything with you.