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How does the loan to value affect the interest rate?

Increased competition within the Lifetime mortgage equity release markets, has led to interest rates becoming increasingly competitive.

Currently starting from 2.41% AER for the lowest loan to value plans, with interest rates increasing up to 6.47% AER for the highest loan to value plans.

The majority of lifetime mortgage plans are typically arranged between 3% AER and 4.5% AER.

There is a direct link between the interest rate and the ratio of loan to value borrowing, so to secure the best interest rate you need to be borrowing less than the maximum amount available to you. If you borrow the maximum that you can, the interest rate is likely to be around 6%.

What happens to the interest charged on lifetime mortgages?

Equity release lifetime mortgage products can be either interest only or roll up interest mortgages.

Interest only lifetime mortgages

With an interest only lifetime mortgage, you will pay the monthly interest as it is accrued. This means that the outstanding balance never changes as the amount owed at any time will be the original loan amount.

Roll up interest lifetime mortgages

Customers who do not want to make any payments at all can roll up their interest throughout the whole term of their mortgage.

This means interest is added onto the debt each month. The outstanding balance will therefore increase over the life of the mortgage as interest is charged on the full amount owed.

This is known as compound interest as interest is charged, not only on the original loan, but also on the interest that has been applied to date. Depending on the term of the loan, this could build up over time to a substantial sum over and above the original loan amount.

How can I get the best equity release lifetime mortgage rate?

The rates available to you will depend on how much you want to borrow compared with the value of your home.  This is known as the loan to value ratio (LTV)). The lowest LTVs qualify for the best rates so borrowing less money will mean that you can access better rates.

What percentage loan to value can you borrow through a lifetime mortgage? 

The amount you can borrow will depend on the age of the youngest borrower at the time of application. The older you are, the more you can borrow. The maximum that can usually be borrowed will be up to 60% of the value of your property.

What is a No Negative Equity Guarantee?

All the lenders we use have a no negative equity guarantee with their plans, to give you the peace of mind that you will never owe more than your house is worth when it is sold.  Any amount still outstanding on the loan will be written off by the lender and neither you nor your beneficiaries will be liable for any shortfall.

What fees are charged with a Lifetime Mortgage?    

  • Lender fee – most lenders will charge a fee for setting up the plan, which usually range between £600 to £2000.  You can either pay this upfront, add it to the cost of the loan or have it deducted from the loan, meaning that you receive less than the full loan amount.
  • Broker feeWe DO NOT charge a broker fee – unlike the vast majority of brokers, who do charge fees.
  • Valuation fee – the lender will need to send a valuer to undertake a valuation of your home as they will need this to base their offer on.

Some plans do include free valuations, so no fee is required on these.

  • Solicitor fee – You will need a solicitor to provide legal advice and oversee the legal documentation needed for your equity release plan.

Some plans do include free legal fees or a contribution.

What are Early Redemption Charges (ERCs) for equity release and lifetime mortgages?

An Early Redemption Charge (ERC) is a fee charged by the lender if you redeem a lifetime mortgage earlier than anticipated.  An ERC may apply if you decide to sell the property and repay the loan.

How are Early Redemption Charges applied?

Fixed term ERCs

Most lenders have fixed ERCs, which are a percentage of the outstanding balance and the percentages usually reduce over time.

For example, you may be required to pay an additional 5% of the balance if you repay the loan between years 1-5, but this might reduce to 3% between years 6-8. After a set period the ERCs may no longer apply.

Gilt based ERCs

Some ERCs are conditional on the current gilt rate (these are British Government bonds). As these rates are variable, it is not possible to know how much the charge would be in advance. This type of ERC is less common.

When do lenders not apply an Early Redemption Charge?

Some lenders have specific special circumstances where they would not apply an ERC, such as in the event of downsizing.

Since November 2019, all lenders have to give 3 years protection to joint borrowers to protect them from ERCs when one of them dies or goes into care. This gives customers 3 years to make sure they want to carry on living in the home without their partner and gives them the opportunity to move somewhere else without financial penalty. 

Is it worth paying a product fee to secure a good rate?

Some lifetime mortgage products charge a sizeable product fee. Whether or not this is worth paying depends on how much you are borrowing.

If you are borrowing a sizable amount of money it may be worth paying a product fee to secure a better rate.  However, if you are only borrowing a small amount then you might be better off not paying a fee and opting for the higher interest rate. 

To find out whether it is worth paying a fee, you need to compare the total amount you will be paying over the lifetime of the loan if a different interest rate was applied.  If the savings you would make by paying a lower interest rate are more than the product fee, then it could make financial sense to pay the fee. It is important to review the quotes provided for any product to look at the breakdown in costs and how the outstanding balance changes over each year that the loan is in place.