Could equity release become more popular than remortgaging for older borrowers?

Many of us aspire to be mortgage free in retirement, no longer weighed down by our biggest monthly outgoing.

However, reality is often very different to aspiration and, as more older people find themselves without the balance to repay on an interest-only mortgage or with many years still left to repay their residential mortgage, it’s no wonder that equity release has steadily grown in popularity over the last decade.

There are many reasons for this, such as there now being hundreds of plans to choose from, but the greatest driver for the growth in equity release is the trend in the interest rates offered. Over the last few years, the average equity release rates have dropped to an all-time low, making lifetime mortgages more affordable than ever. In fact, there are many well-known lenders now offering plans with rates under 3% - such as Aviva, LV = and Canada Life.

So, if you’re over 55 and find yourself coming towards the end of your current mortgage deal, you will want to understand your options. Namely, how does equity release and the other types of ‘later life lending’ – retirement mortgages and retirement interest-only mortgages - stack up in comparison to conventional, residential mortgages?

Continue reading, below, to find out.

Mortgage rates and equity release rates compared over the last five years

According to the most recent Equity Release Council market report, average equity release rates and 5-year fixed rate mortgages (on residential mortgages) are the same for the first time ever; a sign of the equity release industry’s progress.

In fact, many equity release plans offer much better terms than the standard mortgage rates offered by the ‘big six’ banks. These all-time low interest rates certainly debunk any remaining myths that equity release is too expensive for the average consumer.

Average equity release rates are also dropping at a much faster rate than 5-year fixed rate mortgages – almost three times as fast, in fact.

For a full breakdown of equity release rates and 5-year fixed rate mortgages (for those borrowing 95% of the value of the property) over the last five years, see our comparison table, below.

*This table was creating using information from Equity Release Council’s market reports from 2016-2020.

What do low equity release interest rates mean for you?

Quite simply, all-time low interest rates mean that there has never been a better time to consider releasing equity from your home.

With an equity release lifetime mortgage, interest rates are calculated as an annual percentage of the borrowed amount, which compounds or ‘rolls up’ over time. The lower the interest rate, the lesser the impact of compounding interest and the smaller the final repayment when your plan ends.

If we were to use the Rule of 72 (how long a loan takes to double in value which is simply calculated by dividing 72 by the interest rate applicable) with an equity release rate of 3%, for example, it would take 24 years for the size of the loan to double. Additionally, any interest accrued could be offset by your property increasing in value over time – which is likely given that UK house prices experienced their highest growth for six years in 2020 and the historic trends in UK house prices.

Should I remortgage or release equity?

With their low interest rates currently on a par with some 5-year residential mortgages, what else can equity release offer you vs. a conventional mortgage?

A main benefit of a lifetime mortgage, for instance, is that the interest rates are fixed for life and never change; providing added peace of mind. Conversely, residential mortgage rates are only fixed for a set amount of time and, thereafter, fluctuate according to market conditions.   

Many banks are also reluctant to approve residential mortgages for older borrowers. Applicants are subjected to rigorous financial checks, such as lender’s affordability criteria and credit checks – all of which are not required to release equity. 

To help older borrowers, many building societies and other lenders are now offering both retirement and retirement interest-only mortgages. However, as these are also residential mortgages, borrowers do have to pass the lender’s criteria - but their main advantage over equity release is the amount you may be able to borrow. For example, at 60 you could borrow up to 75% of the value of our home with a RIO mortgage. With a lifetime mortgage, it’s just 35%.

Why is this? Well, with a residential mortgage you are committing to making some form of regular repayment, either through repaying just the accruing monthly interest or both the interest and capital. With equity release, this is optional depending upon the plan you choose and your personal circumstances. So, don’t worry, these repayments are not mandatory with a lifetime mortgage.

Equity release also offers a level of flexibility that residential mortgages cannot match. For example, you can borrow a smaller initial amount with a drawdown lifetime mortgage and borrow again in the future at no extra cost. Or you could choose to start making interest only repayments and then flip to a roll up plan in the future if your situation changes.          

Residential mortgages did have the historical upper hand over equity release in that, at the end of the fixed term, you are free to repay your mortgage penalty free. But that’s no longer the case as the majority of lifetime mortgage plans now come with fixed term, early repayment charges, meaning that in the future, the plan could be fully repaid – penalty free.

It’s also worth considering the financial protections that equity release offers and residential mortgages don’t. With equity release it is a legal requirement that you take financial advice from a specially qualified expert. With residential mortgages, you don’t.

With such a big decision that will impact your finances in later life, we believe it’s vital that you speak to an expert. At Equity Release Supermarket we can help you with all your options, from across the whole of the market – which most other advisory services are unable to do as they are tied to specific lenders.  

We appreciate that there’s a lot to take in and to think about and so to find out more about your later life lending options, why not contact the Equity Release Supermarket team on freephone 0800 802 1051 or email  [email protected].