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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

 

Further information on equity release –

 

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Revealed – How the Bank of Mum & Dad use Equity Release to Fund 1st Time Buyers

Saturday, July 5th, 2014

Bank of Mum & Dad

 

It has recently come to my attention, having watched my own daughter attempt to buy her 1st property, how difficult it has become for 1st time buyers to fulfil their dreams of becoming a homeowner.

 

It also occurred to me that EQUITY RELEASE could in fact play a significant role in assisting the “Bank of Mum and Dad” and others in providing funds to enable these dreams to come true.

 

First some FACTS:

  • The average age for 1st time buyers is now 29
  • 2/3rds of 1st time buyers now turn to the Bank of Mum and Dad (BoMAD) for help
  • 30 years ago 12% of income was needed for a deposit on a property. Today this is staggering 82%!
  • The cost of an average house in the UK is 10 times bigger than the average salary rising to 14 times in London
  • In all but 2 regions in the UK, prices are 7 or more times the average salary for that area (Office of National Statistics)
  • More than 3.3 million 20-34 year olds were still living with their parents in 2013

 

Although these figures clearly indicate it is becoming almost impossible for 1st time buyers to get on the property ladder, help could be at hand – YES, from the “Bank of Mum and Dad”

 

Parents are an obvious first point of call. However with rising living costs, low interest rates and diminishing savings pots, it has become increasingly more difficult for mum and dad to find surplus funds to gift to their children, grandchildren or loved ones, to assist in fulfilling the dream of property ownership.

 

However, there could be a way to take an early inheritance from parents now in order to benefit 1st time buyers when the money is needed the most!

 

A special type of retirement mortgage commonly known as Equity Release could potentially unlock cash tied up in a parent’s property. This can enable mum & dad to generate sufficient funds to gift as a deposit on a property purchase for their loved ones.

 

What is equity release?

Equity release schemes are available in two formats – home reversion & the more popular lifetime mortgage. Both of these equity release schemes enable people who own their main residence to release a percentage of its value in return for a tax-free cash lump sum. These two types of equity release mortgages then run for the rest of your life & only repaid once upon death or moving into long term care.

 

The equity release scheme known as a lifetime mortgage has proven the most popular due to its flexibility. This has been strengthened this year with providers such as Hodge Lifetime & Aviva both providing an option to repay upto 10% of the original capital borrowed each year. Therefore, control over its final balance, or even repayment of the whole scheme over the longer term could represent a serious possibility, for either parents to pay, or the children themselves!

 

Lifetime mortgages are available to those aged 55+, with a minimum property value of £60,000. The amount that can be borrowed is not always based on affordability, but on factors such as age & property value. Effectively, the older you are, the greater amount of equity you can release.

 

Following a release of the equity, the lifetime mortgage company places a first legal charge on the property. This is exactly the same as any conventional mortgage and 100% legal ownership is still retained by the client providing peace of mind.

 

Typically, someone age 60 could release equity of between 18-25.5% of the value of the property, dependent on the lender concerned. These equity release funds can be spent on anything you like, however a sensible & cautious approach is always advised. Therefore, parents looking to assist their children onto the property ladder, a lifetime mortgage could prove an effective mortgage vehicle to achieve this goal.

 

Which equity release schemes can help 1st time buyers?

Equity release schemes have become a lot more flexible and innovative these days. You can choose to make NO repayments and have the interest added to the loan which is known as a roll-up lifetime mortgage. The amount borrowed plus any interest accrued is repaid upon sale of the property. This would happen on death (last death if joint plan) or having to go into long term permanent care. Thought must be given here should there be more than one beneficiary. With an increasing balance & possibly reducing net equity figure, consideration must be afforded to any remaining beneficiaries as to what they may potentially receive at the end of the day?

 

However, there are new repayment versions of equity release schemes that have proven even more popular with parents looking to securely gift money to their children to help with a property purchase.

 

Interest only lifetime mortgages from Stonehaven & more2life will allow the repayment of just the interest only element. By repaying interest charged each month prevents the loan from increasing and thus remains level for the rest of the mortgagor’s life. This is a great idea when there is more than one child involved. The problem has always been how to separate the gift now, from the overall inheritance at the end of the day if more than one child is involved?

 

The solution is having an interest only lifetime mortgage. By knowing in advance what the balance will be, this loan amount can be deducted from that child’s share of the inheritance at the end of the day. This would be even fairer for the other siblings, should that child also pay the monthly premiums on behalf of the Bank of Mum & Dad!

 

NEW -Voluntary partial repayment plans

Equity Release Supermarket now has access to specialist equity release schemes where there is the option to repay up to 10% of the original capital released each year without any early repayment charges. These equity release schemes through Aviva & Hodge Lifetime have proved popular for those not just looking to repay the interest, but also the opportunity to repay the equity release scheme in full over approximately 16-17 years. These voluntary partial repayment equity release schemes are proving to be the next generation of the equity release market.

 

How is the Bank of Mum & Dad protected?

All the equity release schemes we recommend are members of the Equity Release Council, which means that there are certain guarantees built into them for consumer protection. As a minimum the Equity Release Council will ensure the following guarantees are included:-

  • The schemes are portable and can be transferred to another qualifying property should you wish to move in the future
  • There is a no-negative equity guarantee which means a debt cannot be left to your estate even if the value of the property becomes less than the balance of the loan outstanding
  • You can live in your house for as long as you wish and with a lifetime mortgage you retain full ownership
  • They can be repaid at any time, subject to potential early repayment charges

 

Benefits of using Equity Release

Contrary to directly gifting your property to your children, by using equity release to gift instead, would avoid any Capital Gains Tax as the main residence is retained by the client. There could still be a potential Inheritance Tax liability, but only if the client died within 7 years of the gift.

 

The lifetime mortgage would be a deductible liability against the client’s estate, reducing the value being taxed and although interest would have to be paid on the loan; this could still prove beneficial to both the client and those receiving the gift. Always consult a tax expert on these matters in conjunction with your independent equity release adviser.

 

Of course let’s not forget the best part of this!

 

The potential to fulfil the dreams of our loved ones in an age where quite frankly, property purchase is almost becoming nothing more than just a dream for some. The joys of parenthood!

 

Next Steps…

I would be delighted to offer a FREE initial consultation to discuss any of the above matters relating to how equity release can help your children step onto the property ladder.

 

Please call me on 07788 605620 or 0203 7517228 or email cathy@equityreleasesupermarket.co.uk

Equity Release – Can it Be Used As a Means Of Bridging Finance?

Wednesday, October 28th, 2009

The industry definition of an equity release scheme is an over 55’s mortgage, albeit with no monthly repayments & finally settled on death or moving into long term care.

 

It is now becoming more apparent that whereas equity release was once considered a lifetime mortgage, people ‘temporarily’ have the opportunity to take advantage of one of a providers’ shortcomings in its plan features.

 

As equity release has been designed to run for the rest of the person’s life, lenders have always seeked to include potentially heavy early repayment charges, should the equity release scheme be redeemed early.

 

This penalty could be either linked to the change in government gilt rates, expire after a set number of years or as we shall discuss; link to the Bank of England base rate. It is this feature that has provided a window of opportunity should people over 55 require short term borrowing facilities.

 

Experience has recently shown that retired clients are now struggling in retirement; income from investments has fallen, annuity rates are not favourable & pensions are falling in popularity with more reliance on fund performance & contributions than defined benefit schemes.

 

Increasingly more debt is also evident in this age group & control of finances is becoming more difficult to manage in the present economic climate, credit cards & loans seeming the preferred choice. Nevertheless, there are options available that can resolve these issues – part time work is becoming more apparent to increase retired incomes. Better management of debts & more consumer information being available as the silver surfers become more online savvy.

 

Advice on the suitability of equity release schemes will primarily discuss all these options & more. Should none of the alternatives be suitable from the client’s point of view, then at this point, equity release can be considered as a last resort.

However, another one of these options would be downsizing. This would involve the emotive issue of selling a property that may have been a family dwelling for a generation. However, in order to raise the necessary funds required this may be the correct solution. Unfortunately, this option may not provide an immediate resolution.

 

House sales are eventually beginning to rise, however this is marginal at present & for someone who requires funds as soon as possible, today’s marketplace could prove an obstacle.

 

But all is not lost – & this is where a temporary bridging facility is available & can be provided by a current equity release provider. Subject to eligibility, the Prudential’s equity release schemes can meet this objective. By taking equity release now with Prudential you would be benefiting from their link with the Bank of England base rate & early repayment charges.

 

In summary, the Prudential equity release schemes will only levy a penalty should the Bank of England base rate fall from inception to the time of repayment. With this rate at an unprecedented low rate of only currently 0.5%, it is highly unlikely (but not impossible) that the rate would be lower than 0.5% in the future. It can therefore be safely assumed that if either of the Prudential’s equity release plans are taken out, whether it be their single lump sum product or innovative increasing cash reserve plan, NO early repayment charge would apply.

 

Therefore, this can be great news therefore for people who have debt issues or need access to short term funds & not have it affect their tight budgetary constraints. With no monthly repayments required, clients can raise funds this year & after a 12 month period could repay in full or partially, with only a deeds release fee of £105 being levied. This could tie in conveniently with the property market improving around this period of time.

With Prudential equity release interest rates currently as low as 6.3%, this is an excellent time to consider this form of borrowing for eligible people over age 55. So while the Bank of England base rates remains at just 0.5% it would be advisable to consider this equity release product as a means of short term borrowing or bridging finance, depending on requirements.

 

In addition to this good news, Equity Release Supermarket have an exclusive offer from Prudential until 31st December 2009. We are able to offer clients applying for the Prudential’s Increasing Cash Reserve plan a free valuation & £300 cashback on completion. So all’s not so gloomy in the equity release market as some would suggest.

 

If you require further information on these topics please contact Mark Gregory on 0800 678 5159 or email mark@equityreleasesupermarket.co.uk

Saffron’s Withdrawal Leaves The Equity Release Market Lacking Spice?

Tuesday, September 29th, 2009

Saffron Building Society  has announced it is to withdraw, albeit temporarily, from the equity release  market after meeting its lending targets for this year.

It has taken this action following a successful year of lending in which 2009 targets have now been met. Also by Saffron withdrawing from the sector now will ensure their lending portfolio remains balanced and within borrowing strategy.

 

A sensible approach maybe?

 

However, this follows the latest setbacks to the market, which has resulted in lenders pulling their products or even positioning themselves so as to reduce their exposure to the equity release market.

This has added in a long line of lenders removing their equity release schemes  over the past 12 months; we had Retirement Plus who had funding issues, Dunfermline hit by the credit crunch & Godiva who recently felt longer term funding was too expensive & consequently decided to ‘temporarily’ withdraw from the equity release market.

 

Also, recognized lenders such as Bradford & Bingley, Standard Life and Bristol & West whom all used wholesale markets to fund their new business, pulled out of the equity release market last year.

Who knows if any of them will be back – certainly not in the short term?

 

Last week New Life Mortgages  reviewed its equity release product range. The New Life Gold product which offers their highest release possible, had its maximum facility slashed by 8%, effectively ruling itself out of the maximum loan end of the market. It also withdrew both drawdown products which are now under review & possibly re-introduced later this year.

But it’s not just the equity release companies who have been affected. Intermediaries too are under financial pressure with this niche product.

 

We had the news recently that Newcastle Building Society are to withdraw their equity release advisory service by the end of the year. They have offered advice on equity release schemes since 2006 & stated the decision was due to the ‘considerable contraction’ in the equity release sector.

 

In Retirement Services, a prominent player in the tied sales force environment went into administration at the end of July with again lack of funding & a purchaser for the business not found. If a company who had been in the market since the 1990’s is left floundering, what is left for the rest of the equity release market?

 

Well, the demand for advice in equity release is still high, but with providers and specialist equity release brokers  withdrawing from the market, as economic conditions become more strained, only points to one outcome.

 

Lenders want consumers to have choice & access to good quality advice. Hence, the departure of such lenders & brokers and also their competitive equity release schemes means in the current climate – ‘only the tough will survive’.

 

Equity release companies who position themselves carefully, without too much exposure are the ones who will deliver in the long term & ride out the current storm.

 

 
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