As schemes to unlock retirement income from property fall in cost, borrowers could gain from switching deals

Schemes designed to allow older people to access the money tied up in their homes are falling in cost, and advisers say that anyone who has an existing equity release mortgage may be able to save money by switching deals.

In the past few days alone, lender Stonehaven has reduced the rate it charges from 6.08% to 5.98%, and over the past year rates have generally fallen by about a percentage point. Barry Adnams, an independent financial adviser with the website Equity Release Supermarket, said the change may seem small, but "that makes a big difference on a long-term loan".

Equity release schemes allow homeowners to take out value built up in their property. The most popular type – the lifetime mortgage – lasts until the homeowner dies or sells their property. Interest on the loan is fixed throughout the life of the loan, and is usually rolled up and added to the initial sum, although deals allowing the borrower to pay off the interest each month are available.

The loan is typically paid off from the proceeds of the property when it is eventually sold, but Adnams said recent interest rate cuts mean it could be worthwhile for people with equity release schemes to check whether they could reduce costs by switching lenders.

Borrowers should beware early repayment charges, however, as these can wipe out the benefit of any change. Adnams said some lenders will be prepared to negotiate about these, especially if, like Prudential and RBS, they have withdrawn from the equity release market. "I was talking to a lady just this morning who took out an equity release scheme six years ago at an interest rate of 6.99%," he said. "With the same lender, she's looking at 5.99%. That's a big change but she faces charges which I'm just in the process of talking to the lender about."

Homeowners can take out this type of scheme from the age of 55, but Adnams recommends that unless the borrower has very good reasons for withdrawing the cash earlier, they should try to wait until they reach 60, if not older.

"The interest roll-up means the loan can double in size over 10 to 12 years," he said. He suggests that if they can afford monthly payments, borrowers should opt for the interest-only versions.

Nevertheless, increasing numbers of people are turning to lifetime mortgages at retirement after realising their pensions are not going to produce as much income as expected. Adnams said that while the ratio of clients aged 70 or older to those under 70 was 60:40 10 years ago, it has reversed now.

The money can be taken as a lump sum or withdrawn in smaller amounts on a regular basis to supplement other income.

Gradual withdrawal is cheaper, as interest is only charged on the amount that has actually been taken out.

Steve Lowe, director at equity release provider Just Retirement, said: "People aged 65 and over who are homeowners have on average £150,000 to £200,000 of housing equity. This is approximately four times more than the average pension fund. So it's no surprise people are choosing to use equity release products to draw small sums of money from the savings stored up in their home to top up their monthly retirement income."

Demand has also been stimulated by homeowners reaching retirement without paying off their ordinary mortgage. Those without sufficient pension income to meet the monthly mortgage payments have to choose between seeking financial help from family, selling up and moving to a smaller, cheaper property, or drawing out equity to repay the mortgage.

John, a former British Gas employee, took early retirement after suffering stress, and despite moving to a slightly cheaper property still found that his retirement income did not stretch far enough. Two years ago he and his wife, who is still working, decided to take out a £25,800 lifetime mortgage from Just Retirement on their £240,000 home, using the money to pay for new windows and a porch.

Just Retirement charges 6.4% on lifetime roll-up mortgages, and a £25,925 roll-up mortgage (£25,000 plus the charges) taken out today would have grown to £27,100 in a year's time, £34,732 in five years, £47,364 in 10 and £88,077 in 20 years.

John is not worried that the growth of the loan will wipe out all the value in the property that could be left to his four children.

He said: "The forecast we got when we took out the loan said that by now it is worth £28,033, and if we still have the loan in 26 years, it will have rolled up to £138,000. But I'm sure my property is worth more than £240,000 now, so that will leave £100,000 to split between them."

Jill Insley © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds



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