The first quarter of 2016 has seen a huge amount of equity release lending. Equity Release Council statistics show that £393 million pounds of equity was released from UK homes. The vast majority of these funds have been released to customers using equity release schemes for the first time. However, some of this money has been released by existing customers of companies who no longer offer equity release; one of whom is the Prudential.
Here we look at what options are available to existing Prudential Lifetime Mortgage customers and whether they should stay with their existing lender or possibly remortgaged to a new provider.
Background to Prudential Equity Release
Prudential offered equity release plans from 2005 to early 2010. At that time, we evidenced the credit crunch and Prudential’s strategic decision to focus in Asia. Both these factors saw Prudential withdraw from the equity release market, preferring to focus its attention elsewhere. During this time, they attracted over 14,000 customers and lent over £1 billion pounds and now have servicing rights over all these existing homeowners’ equity release schemes. Prudential offered both a lump sum & drawdown lifetime mortgage scheme across the UK.
What Equity Release Plans Did Prudential Offer?
Prudential offered two formats of the lifetime mortgage plan;
1Lump Sum Maximum Release Plan
Allowed clients to release a single lump sum amount, up to the maximum amounts available based on age & property value. Plans started at age 55 & with a minimum property value of £100,000 and a £20,000 minimum initial withdrawal limit.
2Increasing Cash Reserve Plan
Was a drawdown lifetime mortgage scheme that enabled a lower initial loan with access to a cash reserve facility. The reserve facility increased annually to provide greater availability of funds. Borrowing was available further approval & subject to a minimum of £5,000. Plans started at age 55 & with a minimum property value of £100,000 with a £10,000 minimum initial withdrawal limit.
Can existing customers still borrow funds from Prudential?
If your existing Prudential scheme was set up with a cash reserve facility you can contact Prudential directly to obtain these funds, without the need for further financial or legal advice. There is a cost of £90 to access each further amount from the reserve. The interest rate for these new funds is currently 6.64% MER and is relatively high in today’s market condition as some companies, such Aviva and Legal & General are offering sub 5% lifetime mortgage rates, on their equity release schemes. Prudential Equity Release won’t consider any other form of additional borrowing.
What if Prudential can’t offer me sufficient equity release funds?
Prudential will have loan-to-value lending limits that still exist which will limit the maximum equity release loan available based on age & property value. Therefore, if Prudential cannot release sufficient equity for your needs then alternative funding options will need to be considered & this is where Equity Release Supermarket’s experience can prove invaluable. Our Equity Release Supermarket calculator can give you an idea of the maximum equity release possible.
Like any conventional mortgage, it’s possible that you can look at transferring your equity release to an alternative company to raise the funds required. Therefore, it’s vital that you get fully independent advice, as you need to undertake an equity release switch plans analysis which will consider whether transferring is in your best interests. This will analyse the costs of moving providers, the latest interest rates and any potential early repayment charges that may be incurred.
What are the advantages in transferring equity release schemes?
- Extra cash lump sum – many providers may be able to offer a larger amounts, as they have higher maximum equity release loan limits
- Lower interest rates – equity release interest rates in 2016 are at an all-time low, so switching to a lower rate could save £1000’s over the long term for beneficiaries
- Voluntary payment options – some providers now allow the option to make voluntary interest payments and therefore service some of the accruing interest. This can reduce the amount owing when the plan ends & maintain control
- Inheritance protection guarantees – you could consider including a feature which protects a portion of your property to leave as a guaranteed inheritance
- Free valuations and cashbacks – many lenders offer a free valuation on new plans and often offer a cash-back which can help towards the new set up fees!
Will I incur a penalty swapping equity release plans?
Any early repayment charge (ERC) with Prudential is linked into the changes in the Bank of England base rate (currently 0.5%). Prudential charged an ERC if the base rate fell from inception of the plan. This is unique to them as most current lenders including Aviva & Legal & General link their potential ERC penalties to the movement in Gilt yields. Some lenders such as LV= & Retirement Advantage offer fixed early repayment charges.
Most Prudential customers face an early repayment charge as the Bank of England base rate dropped dramatically in 2008/9. Therefore, any customers who started a plan before these dates face a potential penalty. However, if you started your plan with Prudential in 2009/10 you may find that there is a small or even no penalty if you transfer to an existing provider as the base rate had fallen to its current 0.5% level at that time. It is therefore best to contact myself, as I can liaise with Prudential on your behalf to establish whether any penalty exists. If there is, I can then establish what the amount could be & any action to be undertaken.
Let’s look at a Prudential case study:
Brian & Joan took out a Prudential equity release plan on a drawdown basis in June 2005. They have a reserve facility with Prudential where their drawdown reserve increases £3,000 per annum for the next 10 years, but they can’t raise any extra funds now when they need it most. They need a new car, boiler and want to enjoy a special holiday for their 25th wedding anniversary so they need a one off lump sum of £40,000 which Prudential can’t provide. They’re currently being charged 6.65% MER interest on their plan.
As Prudential couldn’t meet their fresh objectives, I therefore analysed the whole of the current equity release marketplace, researching who could offer enough money to meet Brian & Joan’s needs. This I completed and had the great news I could, with the added bonus of obtaining a lower interest rate!
Legal & General were able to offer a scheme which allowed a further £58,000 of cash, after repaying the Prudential plan, at a lower rate of interest of 6.12% MER. However, that was more money than needed in one amount, so they instead opted for a More2Life Capital Choice plan which will provide them with the funds they need, at an even lower rate of fixed interest of 5.38% MER (5.60% representative APR).
Brian & Joan also have some spare income each month and plan to pay some voluntary interest payments each year to service some of the interest. This will help them control the balance, an option unavailable with many old equity release schemes such as Prudential’s. More2Life also offered a cashback amount of £2,880 which comfortably covered the set up fees and left extra cash for holidays!
Where can I get advice on whether switching equity release schemes is best?
Should you have a former Prudential Maximum Release Mortgage or Increasing Cash Reserve Plan and need additional funds then specialist advice should always be found. There are many tools on the market which help analyse whether switching equity release is feasible over the long term. This advice also extends to any older equity release mortgages which are still running and maybe worth reviewing even if extra funds are not required.
Please contact myself, Mark Rumney, at Equity Release Supermarket on 01246 418442 / 07957 974826 or email [email protected].
My initial consultation is free and I’ll be able to advise you on whether initially it’s suitable to transfer lifetime mortgage schemes, and if so can look at the whole of the market, before providing full information and quotations. I look forward to hearing from you...