One of the most enjoyable aspects of being an equity release adviser is that every customer is different, and have their own unique set of personal circumstances. One of the main areas concerning my equity release clients is how much equity release will cost them over the longer term. We can calculate the maximum amount of borrowings initially using an equity release calculator, however calculating the actual balance to be repaid upon death or long term care is a different calculation.
My clients vary significantly, from those who have no interest at all in what will be owed when their lifetime mortgage ends, while some are keen to scrutinise the Key Features Illustration (quote) in greater detail, and often want to include guarantees of leaving a legacy.
Homeowners, over the age of 55 often fall into three categories when it comes to leaving an inheritance. Those who:
- Wish to leave a guaranteed inheritance
- Prefer to leave an inheritance
- Not concerned about leaving any inheritance whatsoever
The good news is that today’s equity release schemes in 2016 can cater for all of the above scenarios, thus meeting the changing needs of today’s retirees.
Of those clients who are keen to learn of the long term cost of equity release, one of the most common questions I’m asked is ‘how much will we owe in 10 or 20 years?’
When I worked as an Aviva equity release advisor, lifetime mortgage interest rates on some schemes were often as high as 6.99% AER, around 6 years ago. Therefore, the amount that would be owed assuming a roll-up of interest after 10 years would be double the original loan amount, including the interest. Similarly, the same amount would double again after 20 years!
Therefore, an initial loan of £25,000 would approximately double to £50,000 after 10 years and total around £100,000 after 20 years. A considerable escalating balance as these older equity release schemes had no option of partial repayments to control this balance.
Thankfully interest rates have reduced over the past 6 years, and both Aviva and Legal & General are at the time of writing this article offering the best equity release interest rates below 4%! These lower interest rates have a dramatic impact on the amount owed in the long term should the election be made to allow the interest to compound & roll-up annually.
Let’s look at an example of clients I’ve actually spoken to this week:
William & Mary are looking to borrow £25,000 against their property worth £200,000. I’ve looked at the whole of the equity release market and my research has sourced a low lifetime mortgage interest rate of 3.85% AER. Based on this low rate of interest the amount owing in 10 years would only be £36,476, rather than the £50,000 that would have been owed on the old rates of 6.99%. Furthermore, rather than the cost of loan and interest taking 10 years to double, it now takes over 18 years for the debt to increase to over £50,000! The actual debt in this scenario over 18 years would be £49,347. Therefore, interest charged would be £24,347.
William & Mary are confident that house prices will increase by 1% per annum, therefore they expect their bungalow to have increased in value from £200,000 to £239,229 over 18 years. Therefore, they will enjoy an increase in value of £39,229.
This potential house growth would cover all of the equity release interest which would have accrued the first 18 years of the plan. They would end up with the scenario of actually having more equity remaining than when they started even after releasing the £25,000 equity. (using the aforementioned assumptions)
The above example is usually acceptable to most clients who want to proceed with equity release AND leave an inheritance for their families. You can go one step further and include an inheritance protection guarantee with some lenders, such as More2Life, Aviva, and Legal & General. This enables you to ring-fence a portion of the sale price of your property to leave for your family.
For example, looking back at the above case for William & Mary, they can release up to £50,000. However, as they only need a one-off lump sum of £25,000 they could include the option to include a guarantee of leaving 50% of their property to their family, irrespective of how long they live and the value of their property, because they’ve only released 50% of the available equity.
Another way of reducing the amount owing is by making voluntary interest payments to service some, or all of the interest. Hodge Lifetime were the first lender to introduce this on their Flexible & Lump Sum Lifetime Mortgage plans and is now offered by other lenders such as Legal & General, Aviva, More2Life & OneFamily. These lenders offer voluntary partial payments which allow you to repay up to 10% of the loan amount each year with NO penalty, should you have any disposable income. As payments are voluntary there is no affordability assessment, you can elect to vary the amounts at any time, or even stop and start making payments to suit your circumstances.
For advice in this area and all aspects of equity release please contact me on 07957 974826 / 01246 418442 or email firstname.lastname@example.org.