Launching a unique range of variable & fixed rate equity release schemes, the OneFamily ‘Lite’ & ‘Standard’ plans may herald the start of the greatest innovation the equity release market has seen.
Where many have dared, OneFamily boldly go where no equity release has gone before: The Final Frontier – Variable Interest Rates!
The significance of a variable equity release interest rate should in no way be underestimated, as it marks the end of a long journey that has seen a lack of innovation in lifetime mortgage product design. Understandably, there are economic & regulatory factors that may have influenced such lending decisions of the past. Funding by annuity backed insurance companies, credit crunch, Solvency 2 issues and possibly weak demand for equity release schemes as a whole may have hindered design & development.
However, a new dawn is upon us and there’s an air of confidence that the lifetime mortgage market is now here to stay, to grow & be accepted fully as a mainstream mortgage product. It should still demand the strictness of control over its advice to protect the consumer & continue to build its reputation with the FCA & the general public. But with new cash funding streams coming to the fore, it now means that lenders can start to think outside the box with regards to rate, flexibility & concept of how equity release can fulfil the varying demands of the over 55’s with inter-generational aspirations.
How Equity Release Interest Rates Have Evolved
Having advised on equity release products since 2000, with Norwich Union (now Aviva) I can recall the early days when equity release interest rates were in excess of 8.5% AER. These lifetime mortgage plans were a simple no frills roll-up equity release plan, without the flexibility of today’s drawdown, enhanced or voluntary repayment options. Equity Release balances compounding at 8.5% interest rates, effectively doubles the balance every 10 years. Fortunately, with UK house price escalation between 2000 & 2005 rising by an average of 96%, the impact of this 8.5% roll-up interest wasn’t really felt until the property market started to slow down.
Aviva Equity Release were later to roll-out a product which can be seen as the forerunner to the new OneFamily Variable Equity Release plan. The Aviva Index-Linked Lifetime Mortgage started at age 55 and offered a variable interest rate. Using a base interest rate of 4.89%, which was the lowest rate it could go (collared rate), Aviva then measured RPI on a yearly basis. This annual level of RPI was added to the 4.89% to give the interest rate charged on the plan yearly. Aviva did cap the rate at a maximum of 10%+ therefore ensuring a maximum rate that could ever be charged. This is the same principle behind the new OneFamily Variable rate mechanism; so maybe OneFamily aren’t completely original in design?
Over the years, with the fluctuations of the economy & competition between lenders, rates have reduced accordingly & products become fully regulated by the Financial Conduct Authority. It’s only been the past few years that has seen more determination to bring equity release into the mainstream mortgage market & rid itself of the tag of ‘product of last resort’. New entrants, such as OneFamily, are now on the equity release horizon and looking to fulfil the needs of retirees, as we shall analyse later in this article.
So Who Are OneFamily?
Formed for the benefit of its members, OneFamily are a modern mutual organisation who were formed by the merger of Engage Mutual and Family Investment in 2015. OneFamily is actually the trading name of Family Assurance Friendly Society who have over 2 million members and have £7.5 billion of funds under management.
Their existing product range is investments via a combination of adult Ethical ISA’s & bonds through to the younger generation savings schemes of Junior ISA’s, Bonds and Child Trust Funds. OneFamily already work in the later life market as they currently offer a Guaranteed Over 50s Life Assurance policy. They now see Lifetime Mortgages as an extension of their portfolio of family related products.
OneFamily have joined the industry trade body the Equity Release Council and as a consequence ALL their products offer the protection of the No Negative Equity Guarantee, particularly important where variable interest rates are concerned. Additionally, they have adopted the Council’s Code of Conduct and therefore OneFamily Lifetime Mortgage plans meet all the product standards laid down by the Council. These include a lifetime tenancy for the homeowner, the right to move property, transfer the scheme and finally applicable to OneFamily – a capped rate for variable interest rate plans.
What is the Product Rationale Behind the OneFamily Lifetime Mortgage Range?
From a lenders perspective entering the equity release market for the first time you need to have a USP that stands out from a crowd of existing lenders, all striving to do the same. There is still greater room for manoeuvre for lifetime mortgages companies to embrace innovation & continue driving this market to the next level.
OneFamily Lifetime Mortgages have championed this rationale with the launch of two types of plans; Lump Sum Roll-up and Voluntary Payment Plans. Under each of these are ‘Lite’ and ‘Standard’ versions which can offer both fixed and variable equity release interest rates. Initial launch has therefore generated EIGHT OneFamily plans with their associated interest rates illustrated in the table below: –
Common Features Across the OneFamily Product Range
First, let’s take a look at the lending criteria that apply to ALL the One Family lifetime mortgage plans: –
• Minimum age of the youngest homeowner is 55 years, maximum age 100
• Lowest acceptable property value is £70,000
• Maximum property value at launch is £1.75m
• Minimum loan amount is £10,000
• Maximum loan OneFamily will offer is £500,000
• Property must be located in England, Wales or Scotland
• Fixed 8-year early repayment charges; 6% in years 1-5, 3% for years 6-10 & none thereafter
• Downsizing Protection Option – allows full repayment, with NO penalty, if downsizing occurs 5 years following inception of the plan
• ‘Lite’ products have lower initial loan-to-values of 15% (joint) & 16% (single) of the property value at age 55, rising to a maximum of 45% & 46% respectively at age 85-100
• ‘Standard’ products have higher initial loan-to-values than Lite, which are 20% (joint) & 21% (single) of the property value at age 55, rising to a maximum 50% at age 85-100
The most pleasing aspect of the plan features thus far is the minimum age of 55, as only one lender – Aviva currents operates in the age range of 55-60 year olds. Currently, for married couples under the age of 60, Aviva won’t lend if only one party is on the deeds, or the younger age is below 55. However, OneFamily will now consider such applications subject to waiver, therefore providing a viable alternative!
1. One Family Lump Sum Plans
There are effectively four lump sum plans all offering a simple one-off tax free lump sum lifetime mortgage scheme. The money, once released at completion can be spent on anything the homeowner wishes. OneFamily requires no repayments back from the homeowner, thus interest is added to the loan amount & compounds until the last person has died, or moved into care at which point the property is usually sold & the lender repaid from the proceeds.
2. OneFamily Voluntary Payment Plans
Again, there are four voluntary payment plans which still provide a simple tax-free lump sum of equity. However, where Voluntary Payment plans differ is they provide repayment options to the homeowner. Thus the plan is still roll-up, however each year upto 10% of the original amount borrowed can voluntarily be repaid back to OneFamily with NO penalty.
These payments can commence from day one and can be made by credit card, standing order, cheque or bank transfer. Subject to a minimum £25 voluntary repayment, these plans are designed for the homeowner to control their future balance, however they think fit. Therefore, they could elect to repay the interest-only & maintain a level balance, or upto the 10% limit which has the effect of reducing the balance, similar to a repayment mortgage, or nothing at all.
The ‘Lite’ & ‘Standard’ versions are further separated by the choice as to whether the homeowner requests a fixed or variable interest rate. The obvious choice would seem to be the variable rates initially starting at 2.96% MER, compared to the equivalent fixed rate at 4.98% MER. However, caution must be exercised as the rates can increase in the future and the interest charged with it. Therefore, variable equity release interest rates may be more suited to people who are comfortable with rate increases in order to gain the upside of lower rates initially. For those homeowners NOT comfortable with rate increases & the unknown, OneFamily offers the security of fixed lifetime interest rates. Fixed rates provide the knowledge of knowing exactly what the future balance will be.
How does the OneFamily Variable Interest Rate Work in Practice?
As previously stated, the variable rates are a new and exciting addition to the equity release marketplace. Attractive as the headline 2.96% MER interest rate looks, variable rates are not for everyone. They must therefore be explained concisely & advised upon by specialists such as Equity Release Supermarket advisers who are trained & experienced in such matters.
All the variable rate products have their own base-line interest rate which acts as the lowest point the interest rate can go (collared rate). For instance, on the Lump Sum Lite Plan at launch this is 2.96%. To this figure, each year in December is added the rate of change in the Consumer Price Index (CPI). The results of this calculation represent the next year’s interest rate charged on the loan until the following December, when the same exercise is repeated. Therefore, a one-year rolling fixed rate is effectively offered by OneFamily Lifetime Mortgages.
Although we have seen in a period of relatively low inflation, to counter possible future run-away inflation, OneFamily employs a ‘capped’ interest rate on ALL their variable rate products. This offers a guarantee that rates cannot go over a maximum level. For our headline Lump Sum Lite plan of 2.96% this maximum interest rate is capped rate is 7.72% MER for the life of the plan. A great deal!
CPI is a measure of inflation & is explained in further detail with published rates here on the ONS website.
Who’d Be Suitable for a Variable Equity Release Interest Rate?
Primarily, the attitude towards a variable rate of any individual needs to be understood. Homeowners must be comfortable with possible future increases in rate & the fact this would mean faster roll-up of interest, although this could be constrained with the use of Voluntary Repayments.
Additional reasons for choosing OneFamily’s Lump Sum Variable Interest Rate products could be: –
• People looking to repay mortgages, at or in retirement & looking for the lowest possible rate differential to their current bank/building society mortgage
• Mortgagors with previous experience of variable, discounted or tracker rates
• Homeowners wishing to take advantage in saving over 2% against many of today’s fixed rate equity release schemes
• Those who are not concerned about the roll-up of interest
• Individuals with no family or concerns over who to leave their inheritance to
• Those looking at debt consolidation with no ability to make any monthly interest payments
• Homeowners with future plans to possibly sell up & require little, or no penalty on downsizing after 5 years
OneFamily Lifetime Mortgage Summary
If nothing else, the new range of lifetime mortgage products brings new discussion topics to the table which will encourage the thought process in deciding which equity release scheme is best for any individual. The equity release advice process is not a conveyor belt process, it needs tailored, bespoke research and advice upon discussions with the whole family. Following this process will ultimately provide the homeowner with best advice & a lifetime mortgage plan suited not just now, but also towards their future personal retirement needs.
Headline grabbing variable interest rates, of 2.96% will undoubtedly raise eyebrows and create discussion around the pros & cons of variable equity release interest rates. As an adviser of over 16 years, having advised on Aviva plans with 8.5% AER interest rates, today’s variable capped & collared rates offering a minimum of 2.96% MER and maximum 7.72% MER represents a massive game-changer. Equity Release 2016 and beyond is about greater choice for the consumer.
To learn more about the range of OneFamily Lifetime mortgages please follow these useful links: –