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Archive for January, 2015

How Low Can Equity Release Interest Rates Go?

Sunday, January 25th, 2015

Aviva's lowest ever equity release interest rateHaving been advising on Equity Release since the halcyon days of Norwich Union, I have seen a continual, albeit gradual decrease in the level of equity release interest rates. The latest news has it that Aviva will be aggressively reducing their interest rates today –  Monday 26th January 2015 to an unprecedented lowest rate ever, starting from just 5.13%!

 

So what are the factors behind this interest rate drop, given the rest of the equity release companies trail so far behind Aviva in competitiveness?

 

History of Equity Release Interest Rates

Equity release interest rates historically don’t tend to move that regularly, or by very much. It tends to be market forces that dictate how competitively they wish to be & where they wish to be positioned in the market. Going back the early days of equity release schemes, particularly plans from Northern Rock (now Papilio) and Norwich Union (now Aviva), their early interest rates were in excess of 8%. However, comparatively mainstream mortgage rates were also higher at that time and therefore equity release plans were not considered as expensive as they look today.

 

Time to Consider Interest Rate Diversification?

However, the difference between mainstream mortgage rates and equity release interest rates is the fact that equity release schemes historically have a fixed interest rate for life. Residential mortgages don’t & therefore can be re-appraised frequently which enables the best interest rate to be achieved each time.

 

Perhaps it’s time that equity release providers took time to consider this fixed lifetime interest rate offering? Afterall, the reason that traditional equity release schemes have a fixed rate is to act as a safety net due to the compounding effect of interest as no payments are normally necessary, or permitted. This also aides the protection of their insurance policy, which is the ‘no negative equity guarantee’.

 

How Can Equity Release Lenders Reduce Interest Rates Further?

New Voluntary Repayment Plans from the likes of Aviva, Stonehaven & Hodge Lifetime accept repayments of upto 10%pa with NO penalty and therefore if managed correctly cancel out the potential compounding effect of interest. Therefore, would it not make sense for these lifetime mortgage lenders to offer a reviewable interest rate every so many years? A reviewable interest rate could have a bearing on the nature of early repayment charges where so many equity release companies use the unpredictable nature of government gilts as their barometer. Retirees are looking for greater flexibility these days and a change in structure could certainly assist.

 

Catering to the New Silver Surfer Generation

More retirees are becoming financially savvy, particularly those arriving at retirement still owning interest only mortgages. This crop of mortgagors have experienced the variances in interest rates & the different types of rates available during their mortgage years. For instance, is it not time for a standard variable equity release interest rate, or a tracker equity release interest rate? Why not, if the interest or upto 10% of the original capital is to be repaid each year, then why is it necessary to have a lifetime fixed interest rate?

 

If the equity release market is set to expand it needs further innovation & development of its equity release schemes. Therefore, should the forecast for future interest rates be historically low, then it would make sense to consider the options of tracker, discounted or variable interest rates. Perhaps the future of the no negative equity guarantee can be questionable given this has an effect of increasing the interest rate by upto 0.5%?

Why not have the option of choosing whether to include the no negative equity guarantee, or not. With that would come the choice of two representative interest rates; one including the guarantee & a lower interest rate without it. These options could all help to reduce the future interest rates of equity release plans & help the market move forward & expand.

 

A strong case in question for the optional inclusion of the no negative equity guarantee would be where retirees are committed to making repayments & managing the future balance of their lifetime mortgage scheme. Clearly advice of the consequences of not including this guarantee should always be provided, but we shouldn’t be treating the majority of equity release consumers with kid gloves. Equity releasers can themselves make informed decisions based on the facts & advice provided. As long as the adviser is giving quality impartial equity release advice then why can’t the industry open up & start becoming more diverse in its thought process & product innovation!

 

New Aviva Flexible Lifetime Mortgage Interest Rate

As stated earlier Aviva are to significantly reduce their minimum interest rate on their Flexible Lifetime Mortgage Plan. Equity Release Supermarket is able to obtain a lower interest rate than mainstream equity release advisers. This is set to continue from 26th January 2015 with the reduction in the minimum interest rate as calculated by the Aviva flex tool calculation. The lowest equity release interest rate with Aviva is determined by personal criteria, such as age, property value & also health.

 

Consider the following equity release scenario: –

Mr & Mrs Chambers are aged 67 & 64 respectively & own a property valued at £250,000 which is unencumbered. Unfortunately, Mrs Chambers had cancer last year and they now realised how important it is for them to enjoy their retirement. They wish to go on a cruise, carry out home improvements and release approximately £30,000 with access to a future cash reserve facility.

 

After conducting research with Equity Release Supermarket they were recommended the Aviva Flexi Plan with an interest rate of just 5.13%pa (5.33% representative APR). This recommendation was borrowing £30,000 & having a further cash reserve facility of £33,000 for possible future use.

 

Aviva’s Lowest Ever Equity Release Interest Rate To-Date

This 5.13% enhanced lifetime mortgage rate is the lowest ever equity release interest rate that any home equity release company has made available in the history of equity release & presents many opportunities for retirees to consider their future finances: –

 

  1. Those people with interest only mortgages – where lenders are demanding repayment as the end term has been reached & they are not prepared to extend can benefit from these interest rate reductions. By switching onto the Aviva Flexi Lifetime Mortgage Plan they could consolidate onto a mortgage for life, at a low fixed interest rate, thus enabling them to budget accordingly knowing the interest to be charged in the future.
  1. Existing equity release customers – who are on interest rates that are over 6%pa should consider whether to remain with their existing lender or switch equity release plans. By taking a lower interest rate would mean less interest charged & hence either a lower future balance, or less interest payments to maintain control over the balance. There are factors to consider such as potential early repayment charges & set up costs, however this is a calculation your Equity Release Supermarket adviser can arrange & analyse for you.
  1. Anyone over the age of 55 – who has been contemplating taking a release of equity, but maybe waiting for the optimum interest rate or occasion to apply for it. With the various lifetime mortgage schemes available now including interest only, drawdown & voluntary repayment schemes, the equity release market has never been so competitive.

 

So why have Aviva aggressively reduced their interest rates?

Word has it there are new lenders set to enter the equity release marketplace. With new names entering the market such as L&G and Santander, plus More2life have new funding available, Aviva are sure to find new competitors in their space. Perhaps they are trying to gather as much momentum & market share as possible now before they come under pressure?

 

We have already seen unprecedented movements in equity release interest rates so early in 2015. More2life’s Enhanced Lifetime Mortgage & Interest Choice plans have seen rate reductions, followed by Stonehaven’s Interest Select range in response to keep their market position above More2life. Whatever equity release 2015 has to hold its going to be exciting time and one for any future lifetime mortgage customer can benefit from with the lowest equity release interest rates ever seen.

 

Should you wish to request an Aviva Flexible Lifetime Mortgage quote & find out how low your equity release interest rate could go, please contact Mark Gregory on Freephone 0800 783 9652 or email me at mark@equityreleasesupermarket.co.uk

 

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Weigh Up the Alternatives First – Equity Release Isn’t Always the Answer to Funding Long Term Care Costs

Thursday, January 1st, 2015

Long Term Care SolutionsWith long term care becoming increasingly topical, Equity Release Supermarket are encountering many enquiries where children & attorneys are considering equity release as a possible solution to solving this ageing dilemma. However, as a company we do not automatically assume that equity release is the only answer; there are more alternatives.

 

It is therefore always advisable to seek long term care advice from a specialist who can advise on all aspects of retirement planning to ensure all avenues are explored. This would include claiming any state benefits due, retirement annuities, care fees plans & equity release schemes.

 

The following live case study illustrates how one of my clients was in such a situation & was looking to release equity from their main residence. It explains how I researched & recommended the best long term care plan for their particular needs after exploring & discussing with them all possible solutions…

 

Case Background

I was contacted by a lady whose father – Peter was suffering from Alzheimers disease. Her mother Mary, who was in her 80’s, lived in the bungalow that they jointly owned, but because she suffered from mobility problems, she was unable to care for Peter. She had reluctantly made the difficult decision that Peter would be better cared for in a specialist Care Home.

 

Funding Long Term Care Shortfalls

At the time I spoke to Mary and her daughter, Peter had been living in a very nice Care Home for two years and was settled there. He was aged 86 and the fees for his care were £40,904 per year, the amount of his income that could be used to help fund this cost was £13,345 per year.

The shortfall between Peter’s income and the cost of his care therefore amounted to £27,559 and this shortfall was being paid from the capital that Peter and Mary had in their savings. At the time I spoke with the family, their savings totalled £135,000.

 

Although this amount would seem to be sufficient to fund the present shortfall in the cost of Peters care for nearly another five years, anything that Mary might need outside her normal day to day expenditure would also have to come out of it. This therefore left them in a financial dilemma that needed considering now, before the situation worsened & a long term care plan of action was to be put in place immediately.

 

The bungalow, for instance, badly needed decorating and Mary had not had a holiday for nearly five years. There was also the fact that Long Term Care Fees normally increase by between 3% and 5% per year. All of this needed to be met from this capital and Mary had started to worry that all their capital would be used up very soon, this worry was beginning to affect her health since she was not sleeping very well.

 

Is Equity Release the Solution?

Mary and her daughter had initially thought that taking out an equity release plan may be the only option open to them and this was when they contacted me for advice. They felt that by releasing equity from the property now, instead of using the savings would help preserve the capital into the future. However, after discussing the effect of roll-up interest & the fact that other retirement solutions existed they were prepared to sit down with me & conduct a thorough factfind exercise so I could fully analyse their situation.

 

Benefits of Seeking Independent Long Term Care Advice

Being a SOLLA accredited independent equity release adviser, I have the benefit of being FCA authorised to specialise in long term care, equity release plans, investments & annuities. Whereas many equity release advisers can only provide advice on equity release, whenever ANY advice is being given with regards to using it to solve long term care planning, it should always be referred to a long term care specialist such as myself who has be trained to provide guidance on such matters. We can consider ALL options available, not just equity release which may not always be the best solution.

 

The Long Term Care Solutions

After making an assessment of their situation I looked at the options that were available to them.

 

  1. The first option we looked at was to continue to meet the shortfall from the savings of £135,000. This meant that after annual increases in the cost of Peters care and looking after any needs that Mary might have, such as decorating and holidays, the capital would probably last for about another three or four years. After this period they would be reliant on Local Authority funding. Because the cost of the Care Home that Peter was in was more expensive than the Local Authority funding level, this may have meant Peter moving to a cheaper Care Home. Because he was settled and happy where he was, and the family was happy with the care he was receiving, they did not want this to happen.
  1. The second option was to look at investing the capital in order to obtain an income from the return. An optimistic return on the capital would be about 4% and this would provide an income of £5,400 per year. This would obviously not meet the shortfall of £27,559 and not entirely solve the long term care cost shortfall.
  1. The third option was to purchase a ‘Care Fees Plan’, otherwise known as an Immediate Needs Annuity. After obtaining the necessary medical reports from Peters Care Home and his GP, we received illustrations of the cost of these plans from the relevant providers. By investing a capital sum with the annuity provider, they would then provide a lifetime income payable to either the planholder or care home to cover care fees due.

 

The results were very pleasing. For a lump sum premium of £106,000 a Care Fees Plan could be purchased that would provide Peter with an income of £27,599 per annum for the rest of his life. The income would also rise by 5% each year in order to help cover any increases in the cost of his care. Instead of the income being paid to Peter so his Attorney could then pay his Long Term Care Fees, it was arranged to be paid directly to the Care Home. Arranged in this way, it gave the added bonus that the income would be paid tax free, thereby going further towards meeting the care costs payable.

 

The outcome of funding the cost of Peters care in this way meant that:

  • The cost of Peters care would be met for the rest of his life, regardless of how long that was.
  • The income of £27,599 would increase by 5% compound each year.
  • £29,000 of their capital had been protected for Marys benefit.
  • It had safeguarded the family home to be passed to their daughter.
  • The family had been provided with peace of mind.
  • Equity release is still an option if necessary in the future should circumstances dictate.

 

If you wish to discuss any aspects of this case study or need long term care advice from a SOLLA accredited adviser, please either email me – peter@equityreleasesupermarket.co.uk or telephone 07828 179707. I look forward to hearing from you.

 
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