What’s changed in the last couple of years?
Unlike when I took out a Lifetime Mortgage in 2021 and was able to negotiate a fixed interest rate of 2.47%. Interest rates are rising across the board, loan rates currently start from around 5% with some more costly arrangements being nearer to 7.5%.
The issue with higher interest rates on a lifetime mortgage, is how it compounds over time… If you’ve no one to leave your house or estate to, and you don’t think you’ll need the equity in your home for care costs. Then I guess it doesn’t matter, but if you’ve chosen not to make any repayments to reduce the debt over the term of the loan, then the interest will have compounded and this could prove very expensive.
As an example, if at 60 you were to borrow £20,000 at an interest rate of 6% on your home that’s valued at £120,000 about 14% of house value, the amount you owe doubles every 12 years.
If you were to live until 72 you’ll owe around £40,000, however, live until 84, and you will owe £80,000. Even if your home were to triple in value to say £360,000 over those 24 years, the outstanding loan would have doubled in % terms from 14% to 25% of the property’s value.
In addition to the actual cost of the interest, there are also a number of fees that need to be paid at the time of the loan agreement. In my case, the arrangement fee with the lender was about £1,500 and the solicitor fees were £750 this £2,250 was taken from the loan amount before I received the funds.
Advice is a must!
It’s worth bearing in mind that it is a requirement of the Financial Conduct Authority (FCA) that before you apply for equity release, you seek advice from a qualified equity release adviser. It’s sensible to seek advice from a member of the Equity Release Council.
In addition, It’s important to check that they offer a free consultation and if they do charge any fees, how much they’ll be. It’s also worth checking that they can access deals from all lenders, as you’ll want to consider several offers.
So if you do decide to progress with equity release, make sure it’s from a provider approved by the Equity Release Council.
The Equity Release Council (ERC) is an organisation whose objective is to ensure that lenders and advisers provide the highest possible standards to borrowers. Lenders who are members of the ERC must abide by certain rules and regulations, such as the ‘no negative equity’ guarantee, which means your estate will never owe more than your home is worth. So if you’re seriously considering a lifetime mortgage or home reversion plan, make sure it’s one from a lender that’s an ERC member.
